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ECONOMICS 

FOR HIGH SCHOOLS AND ACADEMIES 



'J%Q^ ^O' 



ECONOMICS 

FOR HIGH SCHOOLS AND 
ACADEMIES 



* BY 

FRANK WrBLACKMAR, Ph.D. 

h 

PROFESSOR OF SOCIOLOGY AND ECONOMICS IN THE 
UNIVERSITY OF KANSAS 



THE MACMILLAN COMPANY 

LONDON : MACMILLAN & CO., Ltd. 
1907 

Ail rights reserved 



^3 



\^ 

fu^MH^ Of CONGffPSSj yp 
I wo Cooies Received 

OCT T '90r 

y^ Copynfht Entry 
CLASS A. XXc.,No, 
COPY 5.- 1 



Copyright, 1907, 
By the MACMILLAN COMPANY. 



Set up and electrotyped. Published September, 1907. 



NotfaooB iPress 

J. S. Gushing Co. — Berwick & Smilli Co. 

Norwood, Mass., U.S.A. 



PREFACE 

The public high school has become a people's col- 
lege whose chief purpose is the preparation for citizen- 
ship. As the politics of the modern state has much 
to do with economics, no one could have an ordinary 
preparation for citizenship without at least a founda- 
tion in the elementary principles of the science of 
economics. Many educators have urged that the sub- 
ject is too difficult for the secondary school curriculum, 
and therefore it should be reserved for university work. 
It is, however, the experience and observation of the 
writer of the present volume that economics, if properly 
presented, is as readily handled as any other subject 
found in the senior year of the well-equipped high 
school. Moreover, because only a small number of 
their graduates continue work in the university, it 
is essential that it be taught, if the school is to 
fulfill its great purpose of preparing its pupils for 
citizenship. True it is that the science of economics 
cannot be mastered in the high school ; but what sub- 
ject is mastered there .'' It is a mistake to exclude those 
subjects from instruction which are best calculated to 
prepare for citizenship and the conduct of life. Espe- 
cially is the study of economics at the present time 
fitted to awaken the interest of young men in public 
affairs and to cause them to retain their interest in high 



PREFACE 

school work, preventing them from leaving the school 
to engage in business. 

The present volume represents the elements of the 
science simply stated. Abstract theories and discus- 
sions have been avoided, while the workings of indus- 
trial society have been emphasized. With these purposes 
in view, the first part of the book is devoted to a brief 
survey of the evolution of industrial society, and the 
second part gives the ordinary principles of economics 
in their simplest form with their application to modern 
industrial society. The last part treats of the relation 
of private economics to public economics and of the 
government control of industries. 

The author is indebted to Professor A. J. Boynton 
for assistance in reading the manuscript of this book. 

FRANK W. BLACKMAR. 

University of Kansas, 
May, 1907. 



CONTENTS 



BOOK FIRST 
INDUSTRIAL EVOLUTION 

CHAPTER 

I. Primitive Industrial Relations . 

II. Early Family Industry . . 

III. Early Medieval Organization . 

IV. Later Medieval Development 

V. From Handcraft to Power Manufacture 

VI. Industrial Revolution .... 

VII. Commercial Development . . 

VIII. Modern Industrial Life 



3 
i8 

28 
37 
45 
SO 
58 
76 



BOOK SECOND 

PRIVATE ECONOMICS 

Part I 

CONSUMPTION 
IX. The Satisfaction of Economic Wants 
X. Nature of Consumption 
XI. Consumption and Saving 



93 

100 
106 



Part II 

FACTORS AND PROCESSES OF PRODUCTION 

XII. The Nature of Production 121 

XIII. Land as a Basis of Production . . . -135 



CONTENTS 



CHAPTER 

XIV. 



XVII. 

XVIII. 

XIX. 

XX. 

XXI. 
XXII. 

XXIII. 
XXIV. 



XXV. 

XXVI. 

XXVII. 

XXVIII. 

XXIX. 

XXX. 



DISTRIBUTION OF INCOME 

Principles of Distribution 
Rent as a Factor in Distribution 
Wages as a Factor in Distribution 
Interest as a Factor in Distribution 
Profits of Business Management . 
Cooperation and Profit Sharing as 

cesses of Distribution . 
Labor Organizations 
Socialism and Economic Distribution 



Pro 



PAGE 



Labor as a Factor in Production 
XV. The Position of Capital in Production 
XVI. Production influenced by Social Organiza- 
tion 180 

Part III 



188 
207 
217 
228 

238 

245 
262 
282 



Part IV 

VALUE, MONEY, AND EXCHANGE 

Utility and Demand 305 

Value 309 

Price and the Market 317 

Money 324 

Credit and Banking 343 

Processes of Exchange 356 



BOOK THIRD 

PUBLIC ECONOMICS 
XXXI. Government Restriction and Control . .371 

XXXII. Taxation and Revenue 389 

INDEX .431 



BOOK FIRST 
INDUSTRIAL EVOLUTION 



CHAPTER I 

PRIMITIVE INDUSTRIAL RELATIONS 

I. Occupations of Primitive Man. — The use of the term 
" primitive man " in this connection refers to man in the 
first stages of industrial development, rather than to prior- 
ity of existence. Therefore it may be used in connection 
with one of the natural races like the Indians of North 
America, or the Kaffirs of x'Vfrica, as well as in reference to 
the cave dwellers or lake dwellers of Europe. Clearly, it 
is the stage of industrial progress rather than the time man 
has been on the earth that concerns us. Hence those 
groups of mankind that have made a small beginning in the 
industrial arts and industrial life in general may be con- 
sidered primitive men, whether they rank chronologically 
as the first of whom we have any record or as those appar- 
ently more recent races that still exist under primitive 
economic conditions. 

In the early period of development, man spent nearly 
all of his time in obtaining food to sustain life, making a 
few implements for use in the chase or for domestic pur- 
poses, making ornaments for decorating the body, and 
providing scant clothing for its protection and meager 
shelter from ^un and storm. The rude implements with 
v/hich he worked caused him to spend nearly all his time 
to preserve his existence. Considering his struggle with 

3 



ECONOMICS FOR HIGH SCHOOLS 

the beasts of the forests and the elements of nature, his 
scanty food supply and poor protection from the elements, 
his lack of medical science, and deficiency in inventive 
power, is it not a marvel that he survived at all and reached 
the high state of culture of modern civilization? At best 
his hfe was meager until he could, by industrial progress, 
acquire wealth and leisure. Even then his industrial life 
was unfolded by slow and painful steps. 

2. Methods of obtaining Food. — The food of primitive 
man was at first largely vegetable, consisting of berries and 
fruits from shrubs and trees, of leaves and bark of trees, 
or of roots dug from the ground. In tropical climates 
there were many fruits of native trees, such as the bread 
fruit, banana, and products of the palms, which gave an 
abundance during certain seasons of the year. The in- 
troduction of animal food enlarged his supply and gave 
greater variety of life. There are evidences of the use of 
animal food among the earliest records of the race. Among 
the relics of the cave man of Europe are long bones which 
have been split open for the marrow, and other indications 
of the use of animal food. No doubt, the reindeer served 
men, as it now does farther north, as means of clothing, 
food, and for other domestic purposes. In the ancient 
shell mounds along the North Sea are evidences of the 
extensive use of shellfish for food. 

As the food was usually uncooked, large animals such 
as the whale, the bear, and the reindeer would be eaten 
in a state of decay. In such cases the tribe or group 
assembled at intervals at the repast. 

Among the North American Indians, animal diet was 
more extensively used than vegetable, although maize was 

4 



PRIMITIVE INDUSTRIAL RELATIONS 

cultivated in a limited way by most tribes. Wild rice was 
regularly harvested by a number of tribes in different parts 
of the United States, especially those of the upper lakes. 
Acorns and pine nuts were staple articles of food for cer- 
tain California tribes. In the early period, the tribes 
gathered only the seeds and fruits which nature spon- 
taneously provided. Subsequently, they learned to till 
the soil in an imperfect way. This tillage became quite 
universal among the natural races, in warm as well as in 
temperate climates. In some regions, the principal diet 
was vegetable, supplemented by animal food; in other 
regions it was animal diet supplemented by vegetable food. 
Whenever tribes were in proximity to the sea, fish and 
shellfish were used to a great extent. Sometimes tribes 
would travel a long distance to the ocean or to a lake or a 
river to obtain fish in the season. A very good example of 
this is the assemblage of the tribes annually on the banks 
of the Columbia River to take the salmon as they ascend 
the stream. The taking of fish caused great effort on 
the part of primitive people and added to their variety of 
occupation. They became skilled in fishing, or hunting 
large and small game, and in agricultural pursuits, which 
not only enlarged their food supply but increased their 
inventive powers. 

3. The Production of Clothing. — Primarily, clothing 
was used for ornamentation of the body rather than as a 
protection from cold, and, except among tribes like the 
Esquimaux, who lived in a cold climate, it was of much 
less importance than the procuring of food. Yet clothing 
had an important industrial significance. The use of bark 
and leaves of trees and fibers of plants brought forth 

5 



ECONOMICS FOR HIGH SCHOOLS 

methods of weaving or platting, and caused great exertion 
in procuring the necessary material. Whenever man lived 
largely by the chase, the use of furs and skins for clothing 
was nearly universal. The tanning of these became a 
great industry and they early became of staple value. In 
many instances the spinning, weaving, and the coloring of 
garments occupied much of the time of certain members 
of the tribe. The methods of spinning and weaving were 
very crude. In spinning the method of rolling the spindle 
on the knee was generally used. The loom consisted of 
vertical lines, or the " warp," attached to a horizontal limb 
or bar, and a corresponding bar on the ground. A stick 
was used to insert the thread or yarn, and another stick 
was used to force the thread down between the vertical 
strings. Prior to this method of weaving, the platting of 
rushes and coarse fibers for clothing and rugs was common. 
Also, the weaving of baskets probably preceded the weav- 
ing of cloth. 

4. The Method of building Houses. — The housing of 
primitive folk was at first rather accidental. Caves, pro- 
tecting rocks, or trees furnished natural shelters. Some- 
times shelters were constructed of branches of trees and 
leaves, or the bark and branches of trees were leaned against 
the fallen trunk. Subsequently, the framework of poles 
was, covered with bark or brush, or with the skins of 
animals, or sometimes with earth. The house-building 
industry was of the most temporary and general nature. 
Yet it varied greatly in different tribes, chiefly on account 
of the nature of chmate and the variety of material at hand. 
Also, the habits of life of the natives had something to 
do with the nature of housing. Thus, the Indians of 

6 



PRIMITIVE INDUSTRIAL RELATIONS 

the buffalo plains constructed their houses of poles, 
arranged in the shape of a cone, and covered them with 
the skins of animals. These were readily portable and the 
house could be easily moved from place to place. In 
other places, under different conditions, natives would 
build their houses of stones, and in highly developed tribes, 
of dressed rock. In New Mexico, the Pueblo Indians 
built their houses of adobe bricks which, in a dry climate, 
were very durable. Again, in the South Sea Islands and 
Africa and South America, the natives frequently built 
their houses in trees or on high poles so as to escape damp- 
ness, wild animals, and reptiles. There is no evidence of 
a distinct commercial interest in house material or in 
house building. Each tribe adapted itself to the condi- 
tions and used the material most easily obtainable. 

5. The Manufacture of Ornaments. — One of the early 
occupations of primitive people which consumed much 
time was the manufacture of ornaments, for personal 
adornment was a characteristic of all primitive peoples. 
It early took the form of tattooing or painting of the body. 
Subsequently, ornaments of shells, bones, teeth of wild 
animals, and woven ornaments of fiber, reeds, and rushes 
were common. Chronologically, the ornamentation of the 
body preceded the use of clothing. The latter was but an 
evolution of the former. Earrings, necklaces, amulets, 
nose rings, bells, and other ornaments were worked out 
with much care. For religious ceremonies, dances, etc., 
many articles of ornament and dress were especially con- 
structed. Because of the lack of skill, it cost many months 
of labor to make some of the more elaborate ornaments 
for the body. 

7 



ECONOMICS FOR HIGH SCHOOLS 

6. The Manufacture of Implements and Utensils. — The 
implements of war, such as the spear, the bow and arrow, 
the war club, and the battle-ax, became so necessary and 
were used to such an extent as to require great skill and 
labor. The utensils for preparing food, others for skinning 
animals and for scraping hides, hoes and spades for agri- 
culture, and hammers and sledges for building gave oppor- 
tunity for work. This manufacture taught man skill with 
his hand, invention of the brain, and trained his nature to 
continuous effort. 

7. The Division of Labor. — It is difhcult to conceive 
of a social state in which every one did everything for him- 
self. Such a state would preclude the division of labor. 
Each would find his own shelter, procure his own clothing 
and food, and fight his own battles against nature and with 
man. Many animal groups have a greater cooperation 
than this. However, the history of mankind reveals many 
social groups in which there was very little cooperation 
and very little division of labor. So dependent was 
each individual in procuring his own food, it might be 
inferred that in the earliest stages no concerted action ex- 
isted in obtaining food. In the order of development, the 
division of labor was primarily between the sexes. Even 
now, among the lowest natural races, this is the usual 
form. Thus, among the Adamans the men hunt pigs, 
catch fish, make the canoes, implements, and weapons ; the 
women supply the firewood, cook the food, catch shell- 
fish and sometimes other fish, make baskets, nets, paddles 
for boats, and shave the men. Among the Fuegians, the 
men procure most of the food, conduct all hunting and 
warlike expeditions, procure building material, and train 



PRIMITIVE INDUSTRIAL RELATIONS 

the dogs. The women keep the fire, make baskets and 
fishing hnes, gather shellfish, and care for the canoes. 
They usually paddle the men about in the canoes and per- 
form other drudgery. 

In general, it may be said that among the natural races, 
man does most of the hunting, fishing, and fighting, and to 
a great extent obtains fuel and building material. The 
women do the basket work, weaving, and platting, care for 
the fire, and perform the cooking. Yet this varies in differ- 
ent tribes. Whenever agriculture is started, it is generally 
performed by the women. They also tan the hides and 
make the clothing. In nearly every natural race, the. 
women carry the burdens and do the drudgery, for the 
condition of woman is a species of slavery. 

Among some of the natural races, the division of labor 
among the men is quite marked. For example, the men 
of the Fuegians divide the work of the chase ; among the 
Fijians there is a distinct class of pig drivers, and among 
the Sandwich Islanders there are house carpenters, canoe 
builders, fishermen, and farmers. There are two classes 
among the women: a superior class that performs the 
light indoor work, and the lower class, occupied in agri- 
culture and general drudgery. 

As the industries became more diversified, the division 
of labor became more and more marked among the bar- 
barous tribes. Trading was not common within the tribe, 
but traders went from tribe to tribe to exchange surplus 
wares. Especially was this common when occupation 
was specialized in different tribes. Thus, one tribe be- 
came noted as basket makers, implement makers, or makers 
of special kinds of implements which became articles of 

9 



ECONOMICS FOR HIGH SCHOOLS 

commerce between the tribes. One tribe in the Samoan 
Islands is skilled in making canoes, another in making 
mats, while in the interior, in proximity to the raw material, 
the inhabitants make nets. Some tribes of the American 
Indians were skilled in making arrowheads, knives, and 
hatchets of flint which were swapped with other tribes 
with whom they were friendly. 

The earliest records of the civilized nations of the world 
indicate that division of labor existed to a considerable 
extent. However, if their pre-historic life could be known, 
it would reveal a simple primitive life in which division of 
labor did not exist in a marked degree. Among the natural 
races, the priest and medicine man were well-defined char- 
acters. In the more advanced tribe and in the primitive 
life among the historical nations, classes of people such as 
soldiers, agricultural laborers, shepherds, and priests were 
distinctly marked. Thus, in the development of the social 
life, division of service began to appear at an early time. 
Whenever social order of any kind appeared, there were 
special persons to maintain it in a variety of ways. 

8. An Artisan Class. — In many of the highly developed 
natural groups there was a more or less distinct artisan 
class. Boats, bows and arrows, stone, bronze, and iron 
implements were made by individuals who devoted much 
of their time to one or more of these industries. In some 
instances, house builders with special knowledge of material 
and structure existed. Usually this was a family affair 
rather than a tribal occupation. Indeed, it may be said 
that the family group worked as a whole in any given 
industry, the one most conA^enient for them, without 
specially trained artisans. Yet, as some individuals 



PRIMITIVE INDUSTRIAL RELATIONS 

showed more skill than others in a certain occupation, it 
could not have been otherwise, when industries were 
varied, that labor became specialized. However, indi- 
vidual skill must have been early recognized among mem- 
bers of a tribe in the working up of raw material. Some 
worked at one occupation more continuously than at 
others, although they may have been more or less acquainted 
with all the occupations of the group. Among the negroes 
of Africa the work with iron at the forge is a specialized 
occupation, although it doubtless was of Semitic or Hamitic 
origin as the influence of these two races extended through- 
out Africa. Travelers report that in the South Sea Islands 
there is specialized labor, where wood carriers, shoemak- 
ers, and carpenters exist. It is possible that this report is 
merely an observation that different individuals were en- 
gaged in those occupations at the same time. 

9. The Care of Stock. — The domestication of animals 
marks a stage of economic progress. At first the utility 
of domesticated animals was not great. This was dis- 
covered by degrees. The dog, for instance, is the most 
universal of domesticated animals, but usually he is a pet 
and a companion. Next to the dog, the domestic hen 
exceeds all animals in its universality. Cattle are found 
among the valleys and in East Africa; the goat is found in 
Africa, the pig in Polynesia, the turkey in America, and 
the llama in South America ; yet, among all natural races 
the service of animals for food or work was comparatively 
small, for they had not yet learned the art of their best use. 
After the domestication of animals, the herding of stock 
became a special occupation. While there are few in- 
stances of this among the natural races, yet among the 



ECONOMICS FOR HIGH SCHOOLS 

early civilized races herding was one of the distinct occu- 
pations, especially after formal agriculture began. 

ID. The Beginning of Agriculture. — It is not known 
how agriculture first began among the tribes. Tilling of 
the soil in many districts doubtless preceded the domestica- 
tion of animals. The traditions of tribes relate how the 
gods were supposed to sow the seeds of grasses and plant 
the fruit trees for the benefit of man. In due course of 
time, according to theory, by supernatural help or agency, 
man learned to sow and to plant and to reap a harvest. 
Agriculture at first was tentative, being carried on by 
semi-nomadic tribes. Subsequently, when a tribe would 
permanently settle in a valley and engage in agricultural 
pursuits, the land was owned in common, as the possession 
of the whole tribe. The village community was an out- 
growth of this system of landholding. The arable land 
was divided into lots and the head of each household was 
allowed to till a lot in accordance with the rule of the tribe. 
Each family was allowed a house lot for his permanent 
habitation. A common woodland, where each had the 
right to use the timber, and a common pasture land ad- 
joined the village. But only the beginnings of this system 
can be found in natural races, hence there are striking con- 
trasts to this community system of agriculture among the 
natural races. Thus, in Java, each cultivator owned and 
managed his own farm, the women of the household usu- 
ally doing the farm work. This was the period of "hoe- 
culture " which preceded the domestication of animals 
and formal agriculture. Among the tribes of the American 
race, agriculture was carried on as an adjunct to hunting, 
to furnish a food supply of maize. Yet, in most instances, 



PRIMITIVE INDUSTRIAL RELATIONS 

it appears to be a tribal action. At least, the property of 
the family group was not clearly defined. Of the two 
methods of tillage, it is difficult to determine which was 
the original, although both were carried on together in 
many instances. It would seem that, excepting hoe-cul- 
ture, individual farming would have been the first attempt, 
and that subsequently the tribe found it necessary to estab- 
lish rules for the cultivation of the soil which would be 
consistent with the community interests. But as the real 
object was to increase the food supply, it is easy to see 
that individual rights could not supersede tribal interests. 
As no primitive people devoted themselves to agriculture 
alone, but had a diversity of occupations, it must have 
increased the means of employment of labor. 

II. Trading and Transportation. — The diversity of 
production in different territories gave rise to an exchange 
of commodities. Of the islands of New Caledonia, some 
were noted for the manufacture of hatchets, some for war 
clubs, others for stone implements, and still others for 
weapons. An active trade sprang up among these islands, 
which formed the elements of commerce. Traders passed 
from tribe to tribe to peddle wares. However, this was 
limited in comparison with other occupations, although 
trading of furs was common with some tribes. It was 
customary for a tribe to excel in the industry near at hand. 
Thus, some tribes excelled in pottery when in proximity to 
clay beds and forced by necessity to procure utensils; 
others, in proximity to reeds and .rushes, became basket 
makers, while others were workers in stone implements 
because of their location near beds of chert or flint. There 
was a limited amount of " swapping " of articles between 

J3 



\ 



ECONOMICS FOR HIGH SCHOOLS 

the tribes. Within the tribe property was held in common 
to a great extent, which made a method of appropriating 
or borrowing, but it did not partake of the nature of modern 
trade. After individual ownership prevailed, there was 
a superstition about individual possessions which was not 
conducive to trade among members of the tribe. So strong 
was this notion of the personality of tools and implements 
that they were usually buried with the owner at his death. 

Transportation was late in developing. Whenever goods 
had to be transported, they were either carried by men and 
women, more often the latter, or on the backs of domestic 
animals or by canoes. There was very little systematic 
trading and consequently little formal transportation in 
primitive tribes. After diversified industries sprang up, 
wealth was created and surplus articles were made for 
the purpose of exchange. The caravans of the East 
were used for transporting goods. At first tliese were 
conducted by the merchants, but subsequently they be- 
came common carriers. 

12. The Ownership of Property. — The modern eco- 
nomic system depends primarily upon the individual 
ownership of property. It is difficult to determine just 
when and how individual ownership originated. Doubt- 
less, like all other forms of social rights, it came about 
gradually. During the nomadic state, while the family 
group worked together, and as they traveled from place to 
place, it is easy to see that the idea of private property 
must have arisen in regard to wearing apparel and pos- 
sibly household articles. It is evident that the idea must 
have occurred by original possession. The individuals 
who were foremost in the hunt were apt to claim a larger 

14 



PRIMITIVE INDUSTRIAL RELATIONS 

proportion of the reward. The person who worked for 
weeks or months on a stone implement would naturally 
claim a right to it, and other members of the tribe would 
probably concede the claim. One can conceive of the 
interchange of implements and clothing quite indiscrimi- 
nately in some primitive tribes, but as social custom became 
crystallized, individual right to property became more 
clearly defined. In the family group of the American 
Indians each member of the household has his own pri- 
vate possessions, although in a general way they are the 
property of the tribe. It is evident that the wandering 
horde or tribe had no conception of ownership of the soil. 
Possession maintained by struggle with other tribes was 
as far as land tenure extended. After the village com- 
munity became established, a well-defined ownership was 
vested in the public. The individual had the right to the 
use of a certain portion of the land, as determined by 
representatives of the whole community. However, at a 
very early stage of the communal holding of land, the 
small family group had the right to the house lot on which 
his cabin was built. This right became inalienable. 

Subsequently, when the village community disintegrated, 
and society shifted from the ethnic to the demotic stage, 
the individual began to hold the land in his own right. 
Originally, the question of ownership was determined by 
might, but as time wore on custom prevailed and ruled. 

13. Irregular Development of Economic Life. — The 
student should be cautioned against assuming too much in 
regard to the formal development of industrial society. 
Indeed, its development was all very irregular. While in 
general human society must have passed through a few 

IS 



ECONOMICS FOR HIGH SCHOOLS 

universal stages of progress, there were many exceptions 
to the rule, and great variety prevailed everyv^here. The 
variety of occupations of the tribes in accordance with 
their environment or their necessity and the irregularity 
of progress made uniformity of development impossible. 
Many tribes missed some of the steps of progress. For 
instance, the so-called " pastoral stage " of human develop- 
ment, emphasized by many writers, was not universal. 
This stage was founded on the domestication of animals. 
As the area occupied by the animals which were domesti- 
cated was comparatively small, pastoral development could 
only occur in proportion to the occurrence of these animals. 
The ox, the horse, the mule, the goat, the ass, the elephant, 
and the camel in the Old World gave rise to the economic 
condition of industry which emphasized this special period 
of development of pastoral pursuits. In the New World, 
the llama of South America being the only domestic 
animal, it is evident that there was no real pastoral period 
in the progress of these races. Yet there are evidences 
of advancement in their civilization equal to that in other 
lands. The making of adobe brick and the building of 
permanent buildings, the cultivation of the soil and the 
practice of irrigation, indicate a stage of development equal 
to that of the Old World at the period of the domestication 
of animals. Also, as was pointed out, there were two 
phases of agriculture : the first was merely the hoe-culture 
of primitive times, carried on principally by the women ; 
the latter was a more formal agriculture, in which the use 
of implements by man and later animal power prevailed. 
Finally steam power was introduced. 
Nor can it be inferred that all tribes passed through the 

i6 



PRIMITIVE INDUSTRIAL RELATIONS 

village community stage of landholding, though among 
the Aryans and their descendants the pastoral stage and 
the community stage of landholding are very clearly 
marked. Another point vv^hich should be carefully ob- 
served is that migration, hunting, and fishing continued 
after agriculture developed, and that agriculture continued 
to develop long after the industrial and commercial stages 
were well along. Economic industry is cumulative, and 
while in a given period one mode may predominate, former 
industries are continued under different forms. 

The only logical and continuous method of discussion 
is to take up a single industry, like agriculture, and follow 
it through the hoe-culture system to the cultivation by 
animal power and steam power, studying the various 
changes in development, and discussing in the same man- 
ner the use of animals, implements, and building. After 
following the development of each separate industry in 
this manner, a comparative development may be presented. 
Whatever method of study is employed, a common con- 
clusion will be reached; namely, that the industrial arts 
progressed by slow degrees, and that thousands of years 
passed while man was learning the meager elements of 
industrial life. 

References.— Biicher, Carl, "Industrial Evolution," pp. 1-182; 
Ely, Richard T., "The Evolution of Industrial Society," pp. 1-66; 
Tacitus, " Germania " ; Deniker, J., "The Races of Man," pp. 144-197 
and pp. 244-280. 



17 



CHAPTER II 

EARLY FAMILY INDUSTRY 

14. Beginnings of Economy. — As the family was the 
first organized social unit, it was within its precincts that 
the first specialization of industry occurred. The early 
organization of industry proceeded with the development 
of the family life. Hence we must look for the beginnings 
of economy in the cooperation of the family group. But 
the transition from the economic state, in which pre- 
vailed the individual search for food, to the cooperative 
life of the family group, in which each had an interest in 
the survival of the group, was very gradual. It is marked 
by the slow accumulation of personal property. This was 
seriously interfered with by superstition which required 
the burial of all personal property with the dead. It was 
believed that the implements made and used by the indi- 
vidual, as well as his clothing, were a part of his personality 
and should go with him to the grave. But gradually there 
came the custom of laying by stores of goods, the building 
of common houses, boats, and larger implements by the 
cooperative work of the members of the group. This gave 
rise to two distinct classes of property, individual and 
family. Later, as the family enlarged into the tribe, a 
third class of collective property appeared. These classes 
were founded on the mode of production. When the indi- 



EARLY FAMILY INDUSTRY 

vidual made a stone arrowhead, or hatchet, or a garment 
with his own labor, or whenever he received such property 
by gift, it belonged to the family. In case, where larger 
groups engaged in hunting, the captured whale or buffalo 
was collective property and was divided among the families 
or individuals in the hunt. The division of goods thus 
acquired was based upon the proportional amount of 
labor contributed. While these practices indicate a cer- 
tain economy of labor and of goods, the economy of time 
among natural races seems to have been deficient. 

Two important customs, that of " taboo " and that of 
" totem," had much influence in determining economic 
production and use. 'The former is an expression of pub- 
lic opinion as given forth by elders, chiefs, or priests, de- 
claring against certain objects and forbidding their use. 
Thus the taboo is used by the Polynesians, forbidding 
the use of yams, bananas, or chickens in time of scarcity. 
For similar reasons the eating of the emu is forbidden by 
Australians to the young before they are initiated into the 
society of the tribe at the beginning of manhood. The 
totem is a representative of family unity and is also a 
symbol of religious sanction. It is used in connection 
with some objects for which the members of the tribe have 
a special veneration and superstition. The sign of the 
totem is attached to all property belonging to the family 
or tribe. Hence it becomes a symbol of unity for the 
group and a badge of ownership. In civilized life we have 
an expression of the same idea in the coat of arms, the 
fraternity or class pin, and in demographic society in the 
flag or banner. The totem and the taboo have a great 
variety of uses, the discussion of which cannot be entered 

19 



ECONOMICS FOR HIGH SCHOOLS 

into here. It is only the economic significance of hmiting 
consumption, as seen in communal possession, that con- 
cerns us. 

It is only among the more advanced natural races that 
the beginnings of economy of goods are observed, such as 
the Pueblo Indians, the Iroquois, and some of the tribes 
of Africa and Asia. Also among the nomadic tribes of 
Asia family industry became, to a certain extent, econo- 
mized. However, it was only when the family life became 
thoroughly unified, as in the Egyptians, Babylonians, 
Greeks, and Romans, that industrial customs became regu- 
lar. Indeed, it was not until a permanent attachment to 
the soil took place that a truly systematized industry be- 
came established and industrial life settled and permanent. 
The land then belongs to the tribe, communal property is 
permanent, and cooperative industry prevails in caring for 
it and maintaining it. 

15. Ancient Family Life. — Perhaps the Greek, the 
Roman, and the Hebrew were the best types of the ancient 
family in races that became highly civilized, although the 
Teutonic family closely resembled these. The early family 
organization existed in lieu of all political organization, 
and as a group it represents an economic unit. The 
organization of economic life followed the development 
of the family. Among the more advanced natural races, 
like the Iroquois, the Aztecs, the Pueblos, a few of the 
advanced tribes of Africa, and the nomadic tribes of Asia, 
family industry became somewhat systematized and 
specialized. However, it is only when the family organiza- 
tion has become unified and developed in such advanced 
races as the Greeks and Romans, or the more ancient nations. 



EARLY FAMILY INDUSTRY 

such as the Hebrews, Egyptians, and Babylonians, that 
industrial practices become regular. In such family 
groups the independent individual struggle for existence 
passes into a household economy, in which the mainte- 
nance of the group is the end sought and which determines 
the process of industry. Things begin to be economized, 
individual ownership of personal property alone prevails, 
and each individual member works for the good of the 
family. The transition from the individual to the group 
system brings forth economy of work. The product of 
individual exertion was an advantage to the group for the 
time being, yet a longer time must exist before the wealth 
was cumulative, owing to the fact that through super- 
stition an individual's personal property was buried with 
him in the grave. Nor did one family work for another 
family, for each was a self-sufficient economic unit. Indi- 
viduals worked primarily for themselves, but in the devel- 
oped family group a division of labor appeared. The line 
of distinction between occupations was drawn closely 
between the sexes. The work of the household was to 
satisfy the wants of its several members. Production, 
distribution, and consumption represented a continuous 
economic process all within the household. Yet, to a great 
extent, every one labored for himself. His wage was the 
actual product of his own toil. In modern industrial 
practices we have had nothing like this, for the modern 
family is far different in its organization from the ancient. 
The ancient family represented the political as well as the 
industrial unit. Thus, in the settlement of the lands of 
the United States a family frequently depended upon 
itself for its food, clothing, implements, and furniture. 



ECONOMICS FOR HIGH SCHOOLS 

most of the articles of consumption being " home-made." 
Likewise, the colonial family of America was self-support- 
ing to a large extent. Household industry satisfied the 
wants of the members of the family. 

It occasionally occurs in modern times that within the 
larger political and industrial unit, family industry resem- 
bles that of the ancient family. In the South, the old 
plantations were to a great extent independent economic 
units, with slave labor. It is true that the main products 
of tobacco or cotton sought a market outside the house- 
hold and articles were imported from outside countries 
or furnished from domestic manufacturers within the 
nation. 

The pastoral families of the early Hebrews, before the 
slavery in Egypt, as represented by Abraham, Isaac, and 
Jacob, are of the self-sufficient type. The chief occupa- 
tion was the care of flocks and herds. However, there is 
evidence of a variety of industries and a partial division 
of labor. Moreover, wearing apparel and other articles 
consumed in the home were in part acquired from outside 
sources. 

i6. The Enlarged Family. — The ancient family ex- 
panded into the gens, or tribe, and still maintained its 
industrial independence. Primarily, very little exchange 
of products took place with other tribes. Even when it 
occurred, it was in the form of barter. But within the 
expanded family a division of labor was more fully devel- 
oped. Some went to the field to till the soil and harvest 
the crops, some went to the loom to weave or to the distaff 
to spin, while others were engaged in making implements 
and still others cared for the flocks and the herds. Yet, in 



EARLY FAMILY INDUSTRY 

all this community life each continued to labor for himself, 
although there was little exchange of goods or services, 
and the common product belonged alike to all. 

The enlarged family group was formed by the union of 
a common household of several generations of blood, who 
owned all property in common and enjoyed the products 
of a common industry. If a new household was set up 
by the marriage of a pair, it became part of the integral 
family. It could not settle by itself and carry on an inde- 
pendent existence, because there was no protection for 
person or property outside of the family group. As time 
went on the number of the household was increased by 
adoption of members of other tribes, although this method 
was limited in its scope until after the introduction of 
slavery. The group became localized, and all who dwelt 
within a given territorial boundary belonged to the indus- 
trial family whether they were related by blood or not. 

Subsequently, as the tribal unity declined, the separate 
household gained power and the old tribal organization 
became a general protective association, looking after the 
new common interests of the groups of households. Such 
work as clearing forests, building ships, guarding fields, 
or other general public affairs were conducted by a group 
of workers contributed from the whole community. But 
the task was a general cooperation, much the same as 
occurred in the early rural communities in the United 
States, when " house raising " and " log rolling " were 
participated in by all the neighbors, or when corn-husking 
" bees " were common for the harvesting of the crops of 
those who were unable to do for themselves. 

17. The Introduction of Slavery. — When slavery was 

23 



ECONOMICS FOR HIGH SCHOOLS 

introduced, a new social order appeared in the family. 
The head of the family became the master of the slaves, 
to each of whom specific duties were assigned. This is 
best exemplified in the Roman family, in which a large 
number of groups of workers under the direction of the 
head of the family engaged in industrial pursuits. There 
were two main groups : those who tilled the soil and car- 
ried on the productive industries, and those who adminis- 
tered to the affairs of the household. Of the former 
Biicher says: "On every large country estate there are a 
manager and an assistant manager with a staff of over- 
seers and taskmasters, who in turn have under them a 
considerable company of field laborers and vine dressers, 
shepherds and tenders of cattle, kitchen and house 
servants, women spinners, male and female weavers, 
fullers, tailors, carpenters, joiners, smiths, workers in 
metal and in the occupations connected with agriculture. 
On the larger estates, each group of laborers is again 
divided into bands of ten each (decurcB) in charge of a 
leader or driver (decurio).'' (" Industrial Evolution," 
p. 99.) 

In the second group are the administrative officials, such 
as superintendent of the revenue, with his treasurer, book- 
keepers, maids, valets, caretakers of property, stewards, 
and those devoted to the amusement of guests. The 
family is thus self-sufficient, and represents a small though 
complete industrial world. Its members are engaged in 
producing goods for their own consumption. It is easy 
to see how the small landholder could not thrive in com- 
petition with the large landholder, with his multitude of 
slaves for every occupation. The Roman family on the 

24 



EARLY FAMILY INDUSTRY 

estate contains the essential elements of the later feudal 
family group of the Middle Ages. Indeed, it is in the 
industrial system of Rome that we find the basis for the 
feudal system. 

1 8. Consumer's Economy. — While the organization 
of a large Roman family with slave labor represented, in 
a measure, all of the elements of a national economy, for 
the whole aim of this extended household was to supply 
the wants of its members through slave labor, it had a 
distinct economic existence. There was no need of trade, 
barter, or commerce. Its whole economy was to supply 
wants by the labor of its own members, independently of 
every other household. It was a consumer's economy, in 
which all labor was directed toward the production of 
those articles needed in daily consumption. No attempt 
was made to create surplus goods for the market, hence all 
labor was apportioned and directed according to immediate 
needs. 

19. Beginnings of State Economy. — So long as society 
rested entirely on an ethnic basis, household economy 
represented the whole economic life; but with the begin- 
nings of the modern state, there occurred elemental forms 
of national economy which gradually multiplied and 
expanded with the growth of the state. For a long time 
in Greece and Rome the family economy existed side by 
side with state economy, the latter involving the political 
method of control. Slavery, as in the household economy, 
was the all-important factor that characterized the life 
of the state. Public roads and aqueducts were built by 
slaves and the public quarries and mines were worked by 
them. Likewise, many public services were performed 

25 



ECONOMICS FOR HIGH SCHOOLS 

by slaves, such as the building and cleaning of streets and 
sewers, the dispensing of charity, the sacrificial service of 
the temples, and the attendance upon public officials. The 
food and raiment of such slaves were furnished from public 
funds, arising from the products of the public domain, or 
in the form of tribute of provisions or fees collected by 
the state. But slavery, want of freedom of competition, 
and the independent relation of the individual to the whole 
community prevented the growth of economic life as it 
exists in modern times. 

In Greece and Rome manufacturing and trading 
were made subordinate to agriculture. Religion and 
philosophy both taught that industry other than agri- 
culture was degrading. Moreover, those nations were 
usually distracted by war conditions, which prevented a 
normal growth of competitive industry which might other- 
wise have arisen. However, the writings of Plato, Aris- 
totle, and Xenophon give evidence of the existence of 
different departments of industrial life and a division of 
labor in Greece, as ethnic society gave way to demo- 
graphic society. Likewise Cicero, Pliny, Seneca, and other 
writers on agriculture exhibit the same conditions in Rome. 
Yet in each country agriculture was the great industry, 
much praised in contrast with trade and manufactures, 
and the practice of slavery characterized the whole eco- 
nomic life. 

The Oriental states, as they passed from the ethnic to 
a demographic basis, developed peculiar characteristics. 
As in Greece and Rome, agriculture was praised in con- 
trast with commerce and the industrial arts. But the 
division of labor was carried to excess, although it was so 

26 



EARLY FAMILY INDUSTRY 

influenced by religious superstition as to degenerate into 
an hereditary caste. Free labor became unknown, and 
the whole system of ancient customs crystallized into a 
non-progressive economic life. 

References. — Adams, G. B., "Civilization during the Middle 
Ages"; Bucher, Carl, "Industrial Evolution," pp. 83-102; Ely, R. 
T., "Evolution of Industrial Society," pp. 43-57; Mason, O. T., 
"Origins of Inventions." 



2-] 



CHAPTER III 

EARLY MEDIAEVAL ORGANIZATION 

20. Rise of Feudal Society. — The decline of the Greek 
and Roman systems of industry founded chiefly on agri- 
culture and slavery, with the self-sufficient family group 
on the estate or plantation, made way for a new system 
called " feudal." The elements of the feudal system 
were found in the methods of managing the Roman estates. 
These elements, joined to the Teutonic method of political 
organization, brought about the mediaeval system. In Eng- 
land, however, the early mediaeval organization was more 
Teutonic than Roman, prior to the invasion of the Normans 
in the eleventh century. On the Continent society became 
completely feudalized and all industry was subjected to 
the conventional usages of the system. The feudal regime 
was constructed from the over- lord to the serf, while 
in England a mild form of feudalism was developing 
before the feudalization of the nation by the Normans. 
Yet as there is more regularity in the development of 
industrial organization in England, the following dis- 
cussion will refer more especially to England and sub- 
sequently to the United States, although the conditions 
in Germany and other states of Europe will not be passed 
unnoticed. 

21. Economic Organization founded on the Prevailing 
Land System. — All political and industrial organization 

28 



EARLY MEDIEVAL ORGANIZATION 

of a permanent character rests upon the manner in which 
the land is held and used. The village community, with 
its communal landholding, necessitated a particular view 
of property rights and inaugurated a special kind of in- 
dustry. We have just noticed the effect of great estates 
and slave labor on the industries of Rome. The expansion 
of the Roman self-sufficient family brought about the 
transition to the feudal system. It was a new method of 
landholding, which grouped all industries about the land, 
made them subordinate to the tillage of the soil, and 
arranged all people in industrial classes. Each man had 
his place as either lord or vassal. So definitely wrought 
out was the system that such a thing as economic freedom 
was unknown, hence all economic or industrial enterprises 
were limited. 

22. The Manorial System. — In general the manorial 
method of land cultivation was the village system, in which 
a small number of people gathered in a village and tilled 
the adjacent land which usually belonged to the lord of the 
manor. The land was divided into small strips, and each 
individual or family held or owned one or more of these 
small strips, ranging in size from one to thirty acres. 
These strips of land held by the individual w^ere seldom 
continuous, but were frequently located in different parts 
of the territory, sometimes some distance apart. Generally 
the title to the land was in the lord of the manor, who 
granted to the holders the right of tillage and imposed cer- 
tain duties and obligations on the farmers for the privilege 
of holding and cultivating the soil. Usually in each village 
was located the manor house, in which the real proprietor 
of the soil or his agent resided. The farmers were obliged 

29 



ECONOMICS FOR HIGH SCHOOLS 

to assist the lord in the harvesting of his crop and to pay 
a certain part of the product of their own land to him for 
its use. The products of each rural district were sufficient 
to supply its needs of food and clothing, so that the whole 
country was made up of independent communities, with 
little exchange between them. Indeed, the implements 
and utensils of farm and household were nearly all made 
within the community, which became practically self- 
sufficient. 

23. Classes of Laborers. — The successor to the slave 
was the villein, or serf, who was a mere clod attached to the 
soil, and had no freedom of action. He could not leave 
the manor, sell live stock from the land, or even give in 
marriage his own daughters, without the consent of the 
lord. Usually there was a fee to be paid in each transac- 
tion that he made. On an average he devoted half his 
time to the service of the lord, for which no compensation 
was received, and the remainder of his time was spent in 
working the land to obtain subsistence and the surplus 
necessary to pay the excessive taxes levied by his lord. 
His condition was practically no better than that of the 
slave, for while he was not bought and sold in the market, 
yet in the transfer of land he went with the land. A glimpse 
of freedom and the partial control of his time may have 
afforded him a little consolation which did not come to the 
slave, yet all he had went to his master in one form or 
another, which made his condition practically that of 
slavery. 

The local agent of each manorial estate for the lord was 
called a bailiff. He had entire supervision of the work 
on the manor and estate and saw that the services of the 

30 



EARLY MEDIEVAL ORGANIZATION 

tenants were performed, that they paid their taxes and 
did the required work of sowing and harvesting on the 
lord's land. He inspected all fields and pastures and 
directed all details of the work. In conjunction- with him 
was the reeve, who was selected by the tenants from among 
their own number. In a measure, he was the representa- 
tive of the tenants and doubtless saw that a certain amount 
of justice was accorded them. 

Over and above these two officers was the steward, who 
lived in the manor and represented the lord as his super- 
intendent, and settled the questions of service, market, 
and rents. He was frequently the superintendent of many 
manors. To a certain extent, the bailiff and the reeve 
were under his direction and supervision. 

24. Division of Labor. — In this period the division of 
labor was not fully accomplished, but the tenants had a 
variety of work, although the industries were very meager. 
Each manor was, in itself, self-sufficient and independent, 
and hence attempted to produce sufficient for its own 
consumption and no more. Wherever small towns sprang 
up, they also became the centers of self-existing systems. 
Each tenant procured his own firewood, or conjointly 
with his fellows obtained timber from the forest and built 
his own dwelling. The skins of slaughtered animals were 
dressed by each for his own use. The simple clothing of 
the villagers was made in their own cabins from woolen 
or linen cloth of their own weaving. Perhaps the most 
distinctive worker was the village smith. His chief occu- 
pation was keeping the irons of the village plows sharpened 
or repaired, and, in fact, he did all the ironwork of the 
tenant family. Closely allied to him was the carpenter, 

31 



ECONOMICS FOR HIGH SCHOOLS 

whose chief occupation was the making and repairing of 
the plows, harrows, and other farm implements. It is 
true that they were often tenant farmers in addition to this, 
but they approached more nearly to the type of indepen- 
dent artisan than any other laborers in the village or about 
the manor. As time went on, industries became more 
specialized, and they became independent artisans and 
spent all of their time at their own occupation. 

After the towns began to spring up, the desires of the 
inhabitants became more diversified and a larger number 
of manufactured articles came into use. Industrial pur- 
suits became specialized. Thus the carpenter and smith, 
who at first were tenant farmers, finally came to be inde- 
pendent tradesmen. In like manner weavers, dyers, 
fullers, butchers, bakers, saddlers, helmetmakers, spurriers, 
plumbers, bricklayers, and cordmakers followed their 
several separate occupations. While these groups became 
more and more distinct, still it is true that each household 
continued to manufacture nearly all of the goods required 
for its own consumption. In addition to this, in each 
manor were clergymen who were also architects, teachers, 
and lawyers, and sometimes men of letters; and a large 
group of servants, but here, as elsewhere, serving was not 
their exclusive business. They had other independent 
duties to perform. As transportation had not yet appeared 
to any great extent, men walked or rode, and carried their 
own bundles. While all classes were, in a nature, bound 
irrevocably to the life they were leading, there was a free- 
dom and independence about this simple life which did 
not appear in the more complex society. The individual, 
the family or community, represented a small world indc- 

32 



EARLY MEDIEVAL ORGANIZATION 

pendent of other small worlds and of the great aggregation 
of the population. 

25. Commerce. — In the period represented in the fore- 
going section, there was very little trading, and this was 
carried on mostly by foreigners. But as the community 
became thoroughly developed, certain products of other 
countries were brought in by pack peddlers or traders, who 
bartered them for other goods of the tenants' manufacture, 
or as money came into use they occasionally sold for cash. 
However, there was no distinct trading group or merchant 
class. As the villages were developed to considerable size, 
open air markets were held once a week. This gave to 
individuals an opportunity to exchange their goods. It 
is interesting to note that this custom prevails to this day, 
in some form or another, in all the towns of our Western 
civilization. More frequently, in modern times, the goods 
are exchanged for money ; but there are a number of in- 
stances where the farmer brings his goods to the grocery 
for exchange. However, there was no transporting group, 
and hence no commerce in the real sense of the word. 
Each man carried his own goods or his own pack and 
looked out for his own conveyances. 

26. Industry. — The groups of laborers are indicative 
of the industry of the time. Mr. Biicher outlines five 
main systems of industry arranged as follows: (i) house 
work, or, as it is called by some, domestic work; (2) wage 
work; (3) handcraft; (4) commission work, which was a 
form of house industry; and (5) factory work. House 
work refers to the production of economic goods in the 
house for the consumption of the household, from raw 
materials furnished by the house, all production being 

D 33 



ECONOMICS FOR HIGH SCHOOLS 

regulated by the needs of the household. There is no 
exchange, no circulation of goods, no money, and but little 
capital. The wealth of the household consists of con- 
sumption goods, such as food products, clothing, utensils, 
and furniture. 

As a rule house work is older than agriculture, as many 
primitive tribes have adopted the form^er who know not 
the latter. The sedentary Indians of New Mexico and 
Arizona have developed skill in working pottery and 
baskets and in weaving blankets and garments. It is 
true that some of them have engaged in hoe-culture in a 
meager way, but house work by far exceeds every other 
form of industry. The Indians of the Northwest coast 
are skilled in making boats, baskets, and implements of 
bone and horn. The tribes of Africa are expert in wood 
carving and weaving, and in some tribes in ironwork. 
Indeed in all primitive industry, house work is the prevailing 
type. 

Among the early Greeks and Romans house work was 
a prominent form of industry after the formal beginning 
of agriculture. In the states of Germany, Norway, and 
Switzerland, house work continues to be prominent to this 
day. In the United States, it has gradually declined until 
the weaving, spinning, and even the baking and making 
of garments, and to a certain extent, the cooking, is done 
outside of the household. But before the decline of house 
work, it reached a stage in which not all goods were manu- 
factured for household consumption. Goods were made 
to sell to others outside of the house. Even to this day, 
in many instances, goods of home production are carried 
to the weekly markets to be disposed of. And it is possible 

34 



EARLY MEDIEVAL ORGANIZATION 

that with the revival of industrial education there may be 
a revival of house work industry. 

27. The Wage-work System. — Following in the natural 
order of development, the wage-work system appeared. 
But it was not like the modern wage system, for the wage- 
worker went from house to house. During his stay in a 
house his board and lodging were given him ; and when 
he was no longer needed, he went on to other places. In 
another way, the wage- worker had his own shop or place 
of business, where raw material was sent hini to be manu- 
factured. In the rural countries of Europe, both methods 
are still in vogue. 

The wage-work system required no capital on the part 
of the manufacturer, no middleman to handle the business 
of production or the sale of goods. The producer was the 
wage- worker, who had no profit on raw material or finished 
product; he received only wages for his work on raw 
material furnished him. The supplying of material by 
the customer was almost universal in mediaeval handcraft 
industry. The first of these methods, the going from 
house to house by the itinerant workman, was the first to 
decline. It passed away in proportion to the development 
of the towns and the home work of the laborer in his own 
shop. The rise of the gild system in the fourteenth 
century practically put an end to the itinerant laborer. 

28. Handcraft Industry. — The laborer finally became 
located and carried on industry in his own shop. People 
brought him the raw material, which he worked into the 
finished product. Subsequently, custom production ap- 
peared in which the master workman furnished the raw 
material and made the finished product for the consumer. 

35 



ECONOMICS FOR HIGH SCHOOLS 

But alongside of this system the wage-work method con- 
tinued for a long time. The handcraftsman differed from 
the wage worker only in the fact that he possessed the raw 
material, from which he made the finished product and 
sold it for a fixed price. 

The next stage of industrial evolution was the commis- 
sion system under which the manager of business employed 
workmen in their own homes and paid them a commission 
for the goods produced. It was an organization of wage 
workers and handcraftsmen under a commercial manager. 
This was followed by the factory system which developed 
in the seventeenth and eighteenth centuries, and which will 
be treated in a future chapter. 

29. Industrial Transition. — It is observed that the 
economic process of production gradually changed with 
the changing of industrial conditions. For example, the 
handcraft system brought two lines of economic activity; 
that of the producer of the raw material on the one hand, 
and the manufacturers of the finished product on the other. 
It separated the movable property from the land or real 
property and brought about other industrial and political 
relationships. It helped to build towns and eventually 
to separate rural life from town life. 

References. — Ashley, W. J., "Economic History"; Bax,Belford, 
"German Society in the Middle Ages"; Biicher, Carl, "Industrial 
Evolution"; Cunningham, W., "Growth of English Industry and 
Commerce," pp. 1-82; Seebohm, Frederic, "English Village Com- 
munity," pp. 1-82; Cheney, Edward P., "Industrial and Social 
History of England," pp. 1-74; Cunningham, W., "Outlines of Eng- 
lish Industrial History"; Gibbins, H. de B., " The Industrial History 
of England." 



36 



CHAPTER IV 

LATER MEDIEVAL DEVELOPMENT 

30. Transfonnation of the Household and the Manor. — 

The house economy of the early Middle Ages was gradually 
transformed through the rise of manufacturing industry 
and the concentration of the population in towns. The 
manorial system was gradually broken down. There were 
many causes for this. One was the introduction of money 
payments for use of land and the gradual relinquishment of 
service on the part of the lords. The manorial courts were 
gradually merged into the judicial machinery of the crown 
and into the local courts of the county and the hundred. 
Villeinage passed out of existence and left a new method 
of farm labor. The establishment of the rental system 
and the gradual transformation of the ownership of land 
in fee simple also hastened the degeneration and decay of 
the manorial system. After the Black Death, which swept 
England in 1349, many changes took place, chief among 
which were the method of leasehold farming and the 
change from tillage to pasture on account of the scarcity 
of laborers. Meantime the towns continued to grow into 
independent existence. 

31. The Rise of Towns. — The growth of the towns was 
gradual. Many of them became fully developed and inde- 
pendent during the manorial period, so that by the middle 

37 



ECONOMICS FOR HIGH SCHOOLS 

of the thirteenth century there were about two hundred 
towns, which varied in size from one thousand to twenty- 
five thousand people. They were different from the rural 
village in organization and in character of business done. 
Many of them received their first independence by 
purchasing it from the lord of the manor. All towns 
had charters, some from the king, from the nobleman, 
abbot, or bishop on whose lands they had developed. 
These charters usually granted the privilege of self-govern- 
ment, and all tolls and general taxes due the government 
were paid by the town through its officers, and not by the 
individual through direct taxation. The town became the 
center of manufactures and trade, just as the manor had 
been the center of agricultural development. Throughout 
Germany and France the towns were even more independ- 
ent than those of England. 

32. Independent Town Economy. — At first, towns had 
but comparatively little trade with each other, for then 
the town manufactured only the goods to be consumed 
by the townspeople and the inhabitants of the adjoining 
rural districts. It was in nature like an expanded house 
economy, for the town became self-sufficient in manu- 
facturing, trade, and industry. The chief occupations 
of the town were manufacturing for domestic consump- 
tion and trading with neighboring manors, other towns, 
and to a certain extent, with towns of foreign countries. 
The markets and fairs continued throughout the medi- 
aeval period, but gradually trading became the occupation 
of members of the town. 

33. The Industrial Classes. — The industrial classes 
were slow in forming. The merchant was frequently a 

38 



LATER MEDIEVAL DEVELOPMENT 

manufacturer who employed his journeymen and had 
his apprentices. The goods were manufactured and 
placed on sale in the shop, or the work was done under 
contract. The classes of weavers, spinners, bricklayers, 
and bakers gradually became separate and distinct. They 
were frequently employed by a master tradesman, who 
paid them wages. The old system of pay in kind gradu- 
ally declined with the rise of the town, and the payment 
of daily or weekly wages became common. It was a 
long time, however, before the manufacturer and trader 
became entirely separate, as the former must find a market 
for his goods. But the manufacturer finally became a 
seller of the goods made only in his own shop. 

34. The Gilds. — The first real organization of the in- 
dustries of the town was represented by the various gilds 
that sprang up. These were varied in general character and 
also changed at different phases of development in the vari- 
ous towns. Foremost among them was what was known 
as the gild merchant. This was an organization of all 
the inhabitants of the town who were engaged in the 
occupation of trading or selling. Its purpose was to 
protect its members from the encroachments of outside 
trade, in other words, to develop a town monopoly of 
trade; and secondly, it had a large social function. The 
business of the town was manufacturing and trading. 
Some goods were brought in from other towns to be dis- 
posed of, or brought from the rural manors and villages, 
but the majority were manufactured and sold in the town. 
All persons who were engaged in selling in any way might 
as a rule be members of the gild merchant. The mem- 
bership did not include all the inhabitants of the town 

39 



ECONOMICS FOR HIGH SCHOOLS 

nor was it always limited by the town walls, for it some- 
times happened that people living in the rural districts 
adjacent to the town were permitted to have membership 
and to sell goods. As the chief duty of the gild merchant 
was to control trade and industry and to preserve to its 
members a monopoly of trade, rules were established for 
its management. While all buying and selling was not 
prohibited to persons not members of the gild, yet trade 
was controlled in such a way that it would not interfere 
with the members of the gild. Certain privileges were 
denied those who were not members, and certain tolls 
or taxes were levied for the privilege of selling, and the 
time and manner were specified. Indeed, sometimes 
persons of other towns were prohibited from engaging 
in trade in towns where the gilds were located. 

While the primary purpose of the gild was to monopo- 
lize trade, a secondary object was that of fraternal or- 
ganization and association. It had its own officers, such 
as president, alderman, steward, deans, chaplain, bailiff, 
and ushers. It seemed to combine many of the charac- 
teristics of the modern fraternal lodge and labor organi- 
zation. Its members were brethren who were obliged 
to accord each other equal rights and privileges and to 
protect one another against any form of oppression. The 
gild looked after its members who were unfortunate 
enough to be cast in prison or to be poverty-stricken. 
These were formally cared for by the gild. They had 
meetings of a business nature and also meetings of a social 
nature. Feasts and dinners made up the principal fea- 
tures of the social life. Because the larger portion of the 
people of the town were members of the gild merchant, 

40 



LATER MEDIEVAL DEVELOPMENT 

it often became almost synonymous with the town govern- 
ment. In many instances its growth declined as more 
formal government arose. In any event it represented 
the real organized power of the community and must 
have had great political influence as well as almost abso- 
lute industrial control. 

35. Craft Gilds. — As industries became more defi- 
nitely organized and the division of labor became more 
marked, the various crafts became independent of each 
other. Just as the gild merchant sought to incorporate 
a membership of all the trades and to control trade, so 
the craft gilds sprang up to control the respective indus- 
tries. The craft gild included in its membership all 
workers in the craft; namely, master, journeyman, and 
apprentice. These were associated for the purpose of 
protecting the industry which they represented. The 
weavers, dyers, glovers, furriers, skinners, and in fact all 
the separate trades, became organized into fraternities. 
These were sometimes called frats, mysteries, or fraternities, 
or by the name of their occupation; such as skinners, 
dyers, etc. The organization of these separate frater- 
nities on the basis of industry helped to disintegrate the 
old gild merchant which flourished in the thirteenth 
century. 

By the middle of the fourteenth century the craft 
gilds had obtained the mastery of the situation. The 
monopolistic idea prevailed in the craft gild as in the 
gild merchant, for the primary object was the protection 
of its members against undue competition or from any 
encroachment upon the trade. There were rules estab- 
lished for the government of members, which defined 

41 



ECONOMICS FOR HIGH SCHOOLS 

the duties and privileges of master, journeyman, and 
apprentice; and thus the social organization of the craft 
gild was more compact and fraternal than the old gild 
merchant. They had common religious observances, 
paid particular attention to the relationship of members, 
and developed a distinct social side. It most frequently 
happened in England that the members of the crafts 
lived in the same city and street, and even attended the 
same parish church, so that the duties of the craft gild 
did not in any way interfere with duties to the church. In 
addition to this, there were many gilds and fraternities 
which existed for social, religious, and charitable pur- 
poses. Industrial society at this period, then, was very 
well organized. Through the influence of the church, and 
of social, fraternal, benevolent, and industrial societies, 
the mutual sympathy of the laborers and tradesmen must 
have been thoroughly established and have exerted a wide 
influence oii the industry of the times. 

36. Piecework, or the Handcraft System. — The hand- 
craft system involved the piecework or day labor. All 
payments were at first in kind. A certain proportion of 
the goods made went to the laborer in cases where there 
were journeymen employed. Subsequently, after money 
payments came into vogue, the laborer worked by the 
piece and received pay according to the amount accom- 
plished. We have a survival of this wherever piecework 
is carried on in modern times. This gradually changed 
into the day labor system, under which it was the 
employer's interest to make the day as long as possible. 

37. The Development of Trade. — As already stated, 
the early method of trade was by fairs or markets held 

42 



LATER MEDIEVAL DEVELOPMENT 

periodically. The fairs were generally held annually, to 
which merchants came from the different towns of England, 
Italy, France, Germany, and Flanders to sell and buy 
goods. After the fair was closed, the traders repaired 
to their own towns to dispose of their purchases to regu- 
lar customers throughout the year. Markets were held 
weekly or semiweekly, and were largely for local pur- 
poses. Gradually trade relations expanded until the 
goods of the principal towns of Europe were exchanged. 
The trading was intermunicipal rather than individual. 
Laws were established for the control of foreign trade, 
all trade outside of the town being recognized as 
foreign. 

Trade relations sprang up between all foreign nations. 
Venice was the center of trade for Italy, the Hanse towns 
for Germany, and Ghent and Bruges were among the 
principal trading towns of Flanders. It was through 
Venice that the trade with the far East became prominent. 
The products of the looms of the Flemish cities were much 
sought for among the cities of all countries. In England 
wool became a staple article, and through the Hanse 
towns the products of the Baltic countries found their 
way into all markets. These were chiefly salt, tar, lum- 
ber, iron, silver, fish, amber, furs, and coarse manufac- 
tured articles. In England, special concessions to towns 
and individuals to engage in foreign trade were granted 
by the king. These were granted for the purpose of 
encouraging foreign trade. Thus, by the close of the 
mediaeval period, the manufactured products of towns 
and the raw materials of every country became inter- 
changeable throughout Europe. This had much to do 

43 



ECONOMICS FOR HIGH SCHOOLS 

in changing social conditions and improving the life of 
the people in general. 

References. — Select readings from Ashley, Biicher, Cheney, 
Cunningham, and Gibbins. See References at the close of the last 
chapter. 



44 



CHAPTER V 

FROM HANDCRAFT TO POWER MANUFACTURE 

38. Self-sufficiency of the Home Declines. — Gradu- 
ally the handcraft work declined and the manufacturing 
was done in factories and large shops. The self-suffi- 
ciency of the home passed away, and the extensive manu- 
facturing of goods for an enlarged market took its place. 
Prior to the decline of the handcraft work, a large increase 
in the number of the master workmen, in proportion to 
the journeymen and apprentices, had taken place. It 
showed to what extent the division of industry was estab- 
lished and how, in the general reorganization of society 
that was to follow, masters, journeymen, and apprentices 
must all be brought into larger units of social order. 
There were many causes for the decline of handcraft and 
the development of large factories. 

39. The Decline of Handcraft through Increased 
Demand for Goods. — Even before the development of 
power manufacture, caused by the inventions of the latter 
part of the eighteenth century, there were forces being 
developed which would eventually cause the slow decline 
of handcraft. A general increase of population through- 
out the various nations, the concentration of the popula- 
tion in cities, the development of trade and commerce, 
which brought large demands upon the manufactured 
goods, were in themselves sufficient to force the concen- . 

45 



ECONOMICS FOR HIGH SCHOOLS 

tration of manufacturing industries. The master with 
one or two journeymen could not fill a large order for 
goods which was demanded by the exigencies of trade. 
Some one must undertake the responsibility of supplying 
these large demands for trade. In the self-sufficient 
family or town, goods that were needed could be manu- 
factured to order, and the consumer could wait until they 
were finished; but the increased consumption of goods 
in foreign markets demanded a large amount of goods at 
once, and only those who were able to place large orders 
could compete in the market. So that, instead of in- 
ventions being the sole cause of the industrial revolu- 
tion that followed, there was an earlier cause for the 
decline of handcraft; in fact, necessity, here as elsewhere, 
was the mother of invention, and the demand for rapid 
manufacture forced the intellect of man to devise ways 
and means of manufacturing goods through improved 
machinery and rapid processes of manufacture. 

Nearly all the large trade fell into the form of com- 
mission business. The small handcraft enterprises were 
consolidated into larger manufacturing plants as the 
process of centralization continued. In other instances 
the larger centralized manufacturing establishments took 
over a large part of the preparatory industries and left 
only the finishing of the article to the hand industries. 
Thus the large number of masters who had a small and 
sometimes meager income were reduced to the level of 
the wage-earner and sometimes nearly to starvation as 
their business became absorbed in larger enterprises. 
As a result, the masters and workmen were obliged to 
seek employment from the large enterprises. 

46 



HANDCRAFT TO POWER MANUFACTURE 

40. Hand Work supplanted by Machinery, — It was 

in this manner that the hand work was gradually sup- 
planted by power manufacture and the handcraft gradu- 
ally declined because goods could not be manufactured by 
hand in competition with machine-made goods. Every- 
where the demand of a larger market and the increase in 
the number of new industries made it impossible for the 
handcraft system to supply the needs of the times. Goods 
must be manufactured on a large scale, and only combined 
industry and power manufacture could satisfy the demand. 

41. Influence of Mechanical Inventions. — During the 
latter part of the eighteenth century great mechanical 
inventions changed the entire method of industrial enter- 
prises. These inventions came through necessity. The 
pressure was large on the spinners who could not supply 
the demand of weavers. One weaver could use the 
product of a number of spinners, hence it was difficult 
to find a sufficient number of the latter to keep the looms 
in operation. The invention of Kay's drop box and 
flying shuttle, in 1738, increased the difficulty, as by it one 
weaver could do as many yards as two could do without 
it. The trouble was so great that the Royal Society 
offered a prize to the person who would invent a machine 
that would spin several threads at the same time. 

The first invention to satisfy this demand was the spin- 
ning jenny of James Hargreaves in 1764. This was 
followed by Arkwright's method of spinning by rollers, 
which was first patented in 1769. Crompton's "mule," 
which combined the inventions of Arkwright and Har- 
greaves, was invented in 1779. By these inventions the 
methods of spinning far exceeded the slower processes 

47 



ECONOMICS FOR HIGH SCHOOLS 

of weaving. Cart Wright's power loom supplied the defi- 
ciency. This was introduced in 1784, and after years of 
development came into general use by the beginning of 
the nineteenth century. 

While these great changes were going on in England, 
the American cotton gin was being perfected by Eli 
Whitney whose great invention dates from 1792. By 
separating the cotton seeds from the boll, the production 
of cotton was greatly stimulated in the United States, 
which caused a great demand for slave labor. 

The perfection of the steam engine in 1769 and its appli- 
cation to power manufacture in 1785, by James Watt, 
completed the methods of rapid production in the textile 
fabrics. 

Roebuck's invention of a new process of smelting ores 
by means of coal supplied a great want as the forests were 
being depleted in making charcoal. His blast furnace 
was invented in 1760, but its full importance was not 
realized until 1790 when the steam engine was used to 
make the blast. This invention stimulated the production 
of coal, causing the great collieries of England to teem with 
life. The dangers of the coal mines from explosions of gas 
caused the invention of Sir Humphry Davy's safety lamp. 
Thus, within a period of a little over forty years, a trans- 
formation of industry occurred, greater than ever known 
before or since, excepting possibly the recent effect of 
electric appliances. 

The great improvement of industry caused by the rapid 
increase in production had its influence on transportation. 
The building of canals from towns to tidewater for the 
purpose of cheap transportation followed. The first of 



HANDCRAFT TO POWER MANUFACTURE 

these was built in 1761 from Manchester to Worsley. Tel- 
ford and macadam roads were built over England during 
the last part of the eighteenth century. These were of 
immense benefit as the modern railway had not yet come 
into use. In the United States the building of roads and 
canals received a good start in the nineteenth century until 
checked by railroad building. It may be well to remark 
incidentally that no more lasting service was ever done 
for England than the building of good macadam roads 
throughout the realm. The recent return to road building 
in the United States is an acknowledgment that it was a 
great mistake to delay for nearly a century such a great 
and needed improvement. 

42. Agricultural Changes. — The old methods of agri- 
culture passed away along with the old methods of pro- 
duction. The lands were mostly held in small strips 
widely scattered. By what is known as the process of 
"inclosures" these small strips were united into one 
large tract and each owner given his share in a contiguous 
piece of land, greatly facilitating the work of the farmer. 
Improved methods of tilling the soil were introduced, and 
the productivity of the soil was greatly improved. Meth- 
ods of drainage of wet lands and the use of fertihzers with 
rotation of years wrought the great change. The breeding 
of higher grades of sheep and cattle was made important. 
Large amounts of capital were invested in agriculture 
which greatly increased the importance of farming. 
Finally, in 1793, a government Board of Agriculture was 
created to advance scientific farming. 

References. — See Chapter III. 



49 



CHAPTER VI 

INDUSTRIAL REVOLUTION 

43. The Effects of Power Manufacture. — At first the 
spinning jenny could be used in cottages, but as the power 
loom became perfected it was necessary to have a special 
building for its work. The improvement in machinery, the 
increase in the size of machines, led to the construction of 
large buildings for the purpose of manufacturing. The card- 
ing, spinning, and weaving were all done under one roof. The 
effect of power manufacture was not only to change the 
entire method of production, but also to change the whole 
fabric of industrial society. This was done so completely 
and so rapidly, almost in a quarter of a century, that it has 
become known as the industrial revolution. It affected 
all kinds of industry and every part of industrial society. 

44. The Factory System. — It was at this period that 
the well-known factory system was evolved. The domestic 
and gild systems were inadequate to the demands of power 
manufacturing. The method required larger buildings or 
factories, the accumulation of capital, and the aggregation 
of large bodies of laborers. First of all the woolen mills 
were built, and these were followed by cotton mills ; then 
in rapid succession came factories for w^orking metals, 
wooden wares, leather goods, and other forms of produc- 
tion. These new methods of production revolutionized 
industrial society. 

so 



INDUSTRIAL REVOLUTION 

Prior to this goods were usually manufactured in the 
home or small shops adjacent thereto. All of the pro- 
cesses of manufacturing an article from raw material to 
the finished product were carried on under one roof. The 
goods were sold as made or placed in the shop to await 
customers. Frequently the apprentices and laborers lived 
with the master and received remuneration in goods or 
money in proportion to the amount of work done. 

Under the new method the laborers received a daily wage 
and dwelt apart from the manufacturers and capitalists. 
Indeed many of the small masters, owing to the concentra- 
tion of industry, became laborers or foremen in the fac- 
tories. Three distinct industrial factors appeared; namely, 
capitalists, manufacturers, and laborers. The use of 
machinery brought about the division of labor, and instead 
of a laborer completing an article, it took a large number 
of workmen to make the finished product, each doing a 
small part. 

The organization of industry left the laborer not only to 
compete with his fellows for position and wages, but to 
combat single-handed the combination of capital and 
managing ability. This he could not do successfully. 
Therefore, to save themselves from industrial slavery, the 
laborers began to organize. This was the foundation of 
trade unionism. The object of the organization was 
chiefly to shorten the hours of labor, insure a living wage, 
and to correct factory abuses. Soon two great industrial 
forces, organized capital and organized labor, each essential 
to the other in production, became suddenly antagonistic 
on account of discrepancies in distribution. 

45. The Effects of Factory Life. — During the last three 

SI 



ECONOMICS FOR HIGH SCHOOLS 

decades of the eighteenth century the productive industries 
of England were well established under the factory system. 
Under it England grew rapidly in wealth and power. 
Trade improved, industries developed, commerce ex- 
panded, and the population increased. But with all of 
these signs of prosperity, untold misery came to large 
classes of the laboring population. The industrial revolu- 
tion brought great prosperity to the world, but caused 
multitudes of laborers to suffer. In all rapid industrial 
progress attendant upon discovery, invention, or new in- 
dustrial methods, the world at large progresses, while 
many individuals suffer on account of changes in condi- 
tions to which it takes time for the population to adjust 
itself. 

Hand work continued to survive a miserable existence 
in garrets and cottages in England, unable to compete with 
power manufacture. In Germany and elsewhere on the 
continent, hand work and independent production were 
more persistent than in England. Before the passing of 
the first half of the nineteenth century, the factory system 
had obtained complete mastery of England. Many labor- 
ers who were not able to adjust themselves to the new con- 
ditions became paupers and vagabonds. For those who 
labored, wages were higher though less certain, and the 
cost of living was increased. The mills were unsanitary 
and uncomfortable; the days of labor were long, being 
twelve to thirteen and sometimes fourteen hours. A large 
number of women and children worked in factories and 
mines. The wage system applied to farm labor entailed 
a hopeless and restless existence. The factories always 
absorbed the young life, and without restriction became 

52 



INDUSTRIAL REVOLUTION 

heartless destroyers of women and children. England 
was growing rich, but human happiness was not increasing. 

46. Theory of Non-mterference with Economic Pro- 
duction. — A well-developed policy of leaving economic 
production to free competition and to the control of the 
law of supply and demand prevailed in the industrial world. 
Government restrictions were removed, liberty of individual 
choice was extended, and the philosophy of making a 
nation rich, regardless of social conditions, prevailed. The 
philosophers taught political rights and civil liberty, and 
the government hastened to protect the individual in this 
liberty and these rights. But economic production and 
distribution must be left entirely to itself to work out its 
own problems. The nations were seeking the best methods 
of growing wealthy and neglecting the more important 
question of social well-being and human happiness. 

47. The Development of Political Economy. — Adam 
Smith has been called the " Father of Political Economy." 
His " Wealth of Nations " was the first monumental work 
of the science. He advanced the theory of the entire re- 
moval of artificial interference with economic production 
and trade. His work was devoted largely to production 
and failed to give adequate attention to distribution. He 
showed how a nation could grow rich, but did not show how 
it could grow rich and just at the same time. Malthus, 
Ricardo, McCullough, Mill, and Cairnes followed in the 
line of succession and continued to develop the economic 
theories of Smith. The laissez-faire or non-interference 
policy became thoroughly established. Enlightened eco- 
nomic discussion aided greatly industrial development, 
but fell short of satisfying many of the needs of the times. 

53 



ECONOMICS FOR HIGH SCHOOLS 

As a science in its narrow sense, political economy had 
nothing to do with ethics and the adjustment of the finer 
social relations. 

For centuries preceding the advent of the doctrine of 
Smith and his followers the government had considered it 
its duty to interfere with trade, labor, wages, and in fact 
all economic conditions. The growth of the sentiment of 
liberty influenced by political revolutions, particularly in 
France and America, was applied to the industrial world. 
If men were allowed to be free in economic choice, if all 
industry was left to the control of natural economic law, 
the industrial system would conform to theories of justice. 

Gradually all government control of labor declined. 
English laws regulating apprentices were modified in 1803, 
1809, 1813, and were finally abolished in 1844. The 
Navigation Acts began to decline in 1796, and by 1849 
were entirely repealed. The removal of export and import 
duties was finally accomplished in 1849 ^^^er a long agita- 
tion. Free trade became the adopted policy. The influ- 
ence of the pohcy of non-interference was felt in every eco- 
nomic enterprise. Many of the acts were wise measures, 
for the mediaeval restrictions were in reality a detriment 
to economic progress ; but a total abandonment of govern- 
ment control could lead only to injustice, for it was based 
on the principle of the survival of the fittest. It was a 
return to natural justice in the economic world in which 
might made right. 

48. Reaction from the Non-interference Policy. — 
Meanwhile the nation gradually awakened to the abuses 
that had crept in with too much freedom. A great political 
reform movement swept over England about 1830, which 

54 



INDUSTRIAL REVOLUTION 

changed the political complexion of parliament and made 
it more truly representative of the popular will. From a 
complete aristocracy, the nation made seven strides toward 
a true democracy. With the vitalizing of political govern- 
ment, the needs of the people became prominent again. 
The first important reform was attended with factory legis- 
lation. The labor of children of seven years of age and 
upward had become a national shame. The long hours, 
the hot, uncomfortable factories, and the harsh treatment 
of masters finally aroused the nation. The agitation began 
in 1796 and continued during the whole of the nineteenth 
century. Shorter hours of labor, sanitary conditions, em- 
ployer's liability to the laborer for injuries, prevention of 
young children and women from labor in mines and fac- 
tories were finally established. It took nearly a half cen- 
tury of agitation before adequate legislation was brought 
about. Indeed it was not until the close of the nineteenth 
century that it could be said that the English factories 
were well regulated. With the same vigor the regulation 
of agricultural affairs was carried on. Nor did the gov- 
ernment stop with government regulation of industries, but 
became an active agent in carrying on industries. The 
telegraph, the telephone, the postal savings bank, and the 
parcels post are owned and operated by the government 
of England. If not a reversal of the doctrine of non- 
interference in industry, it is a demonstration that the 
doctrine is entirely insufficient to satisfy modern demands, 
and that government regulation to a limited extent at 
least is necessary to secure industrial rights of the people. 
49. Labor Organization. — While the government in- 
creased its control of industry, voluntary association for 

55 



ECONOMICS FOR HIGH SCHOOLS 

business or protection developed rapidly. Labor organiza- 
tions, which at first were declared unlawful, have become 
permanent and essential institutions. Before the middle 
of the nineteenth century, trade unions existed in England 
in nearly all lines of industry. They experienced a rapid 
growth in 1830 and 1834. After the law of 1871, which 
accorded them legal right to exist, another period of growth 
appeared in 1873 and 1874. The last period of growth 
began in 1889. During this period England became com- 
pletely unionized and the unions are federated, but they 
are well regulated by wholesome laws. 

50. Conditions in the United States. — The early eco- 
nomic conditions of the United States varied from those of 
England on account of the undeveloped state of industries 
in the former country. In the main, however, the United 
States is traveling over the same course as England took; 
only, on account of immature conditions of industry, the 
principal movements have been about twenty-five years 
behind England. The non-interference doctrine prevailed 
in everything except the tariff which became a government 
policy about the time England was agitating free trade. 
But in the regulation of labor and industry, in the control 
of corporations, in factory legislation, and, indeed, in every- 
thing pertaining to the regulation of industry, the govern- 
ment has evinced a wholesome fear of interfering with 
trade and industry. More recently the United States has 
awakened to the fact that regulation and control, in a 
measure, is necessary for the perpetuation of civil liberty 
and the establishment of industrial liberty and justice. 
One of the great difhculties of government regulation of 
industry and commerce is the Federal system of govern- 

56 



INDUSTRIAL REVOLUTION 

ment. A single state attempts to regulate a railway, in- 
surance company, or industrial corporation which does an 
interstate business, or a state may attempt a reform in 
taxation which is not consistent with laws and practices 
of surrounding states. Its success is not assured until 
Federal cooperation or control is invoked. The limitations 
of constitutional rights frequently prevent a proper adjust- 
ment. While the wants of the people are easily made 
known in the government of the United States, the satis- 
faction of the demands of substantial reform is difficult to 
attain. 

References. — Biicher, "Industrial Evolution"; Ashley, "Eco- 
nomic History"; Cunningham, "Growth of English Industry and 
Commerce"; Cheney, "Industrial and Social History of England"; 
Ely, "Evolution of Industrial Society." See Chapter HI. 



57 



CHAPTER VII 

COMMERCIAL DEVELOPMENT 

51. Trade among Primitive Peoples. — Commerce in 
its formal meaning could not be said to have existed among 
the natural races, nor, indeed, among those of barbarous 
character. Among these people each tribe was self- 
sufficient; it produced what it consumed. Many of the 
tribes engaged in barter of certain articles and in war 
plundered the goods of one another, but it was not until 
the division of labor and the development of systematic 
manufacturing that anything worthy the name of com- 
merce existed. At first this trade of primitive peoples was 
merely incidental to their meeting, but subsequently 
traders sprang up who went from tribe to tribe carrying 
various wares. Intertribal trade was, at first, a rude spe- 
cies of barter, in which the value of the article had but 
little weight. It was a method of " swapping " to promote 
good will or to please the fancy. Subsequently it became 
a method of satisfying the needs of the tribes, which could 
not be done with home production. Among the primitive 
tribes of America, Indian traders existed who carried 
trinkets and ornaments from tribe to tribe. In India, 
where all ancient customs seem to have crystallized, the 
single trader continued down to recent times. Among 
Asiatic peoples, trade was carried on overland with great 
caravans. 

S8 



COMMERCIAL DEVELOPMENT 

52. Commerce of Ancient Nations. — After national 
life had been well begun, a system of commerce between 
ancient nations sprang up, and the earliest records of 
China, India, Russia, Assyria, Ethiopia, and Phoenicia are 
of wealthy nations engaged in extensive commerce. This 
brought into existence a distinct class of merchants, or 
traders. The methods of transportation of ancient nations 
varied according to their geographical conditions and the 
degree of their economic development. First, there were 
the great caravans of the desert, in which the carrying 
power was the camel or, as in India, the elephant. In 
western Asia the caravans which traveled overland between 
the great cities of Egypt, Assyria, Persia, and Palestine, 
were chiefly conducted by Arab traders. Subsequently 
river traffic developed, but it was national rather than 
international commerce. The Ganges and the Indus, the 
Tigris and the Euphrates, the Nile, and in modern times 
the Danube, the Elbe, and the Po were means of traffic 
between different cities and countries. Later, as boatmen 
became more venturesome, the inland seas became high- 
ways of commerce, and early traders ventured on the 
Persian Gulf, the Black, Mediterranean, Caspian, and 
iEgean seas. 

53. The Phoenicians were Masters of Commerce. — 
The only people of antiquity that could aspire to claims of 
commercial greatness were the Phoenicians, who were the 
first to become really masters of traffic on inland seas. 
The great and wealthy cities of Tyre and Sidon, situated 
on the east shore of the Mediterranean Sea, became the 
centers of an extensive commerce. From these points 
the Phoenicians trafficked with Egypt, Assyria, India, and 

59 



ECONOMICS FOR HIGH SCHOOLS 

subsequently with Greece, Rome, Spain, and Britain, and 
became famib'ar with all the coasts and ports of the Medi- 
terranean. Abandoning the prevalent system of obtaining 
wealth by conquest and plunder, these people gained their 
wealth and independence through industry and commerce. 
The secret of their power seems to have been an inordinate 
desire for gain, skill in shipbuilding, the manufacture of 
certain articles not found in other nations, and the ad- 
venturous disposition of their seamen. The advantage of 
having the carrying trade for the world was a source of 
enormous wealth, and the cities became rich and populous. 
For the five or six hundred years that the Phoenicians ruled 
the seas, they planted colonies in Greece, Italy, northern 
Africa, Spain, and Asia Minor. The most important of 
these colonies was that of Carthage, built and planned after 
the city of Tyre. The Carthaginians continued to develop 
wealth by trade in the same manner as the parent colony. 
They developed sufficient strength to cope again and again 
with the Roman nation, but were finally overthrown. 
During the period of Phoenician supremacy, Greece, 
developed a limited commerce, although her states, cities, 
and colonies were largely self-sufficient. Rome was not 
a commercial nation, for primarily her wealth came from 
agriculture, and when she became strong enough to gain 
her wealth by trade, she obtained it by conquest and plunder 
instead. Yet many ships laden with foreign goods came 
up the Po and the Tiber and visited the seaport towns. 

54. Mediaeval Commerce. — The great commercial 
period which lies between the fall of the Roman Empire, 
476 A.D., and the discovery of America by Columbus is 
marked by three important developments ; namely, Byzan- 

60 



COMMERCIAL DEVELOPMENT 

tine commerce, the rise of the Italian cities, and the or- 
ganization of the Hanseatic League. After Constantine 
estabhshed the seat of the empire at Byzantium, this city 
gradually grew into a center of Oriental trade. For a thou- 
sand years the strait of Bosphorus was the gateway of 
trade between the East and the West ; for a thousand years 
the trade of the Mediterranean Sea and the caravan routes 
was focused at Byzantium or Constantinople. During 
the Dark Ages the city of Constantinople fostered what 
little commerce existed in the East, while in the west of 
Europe the monasteries and princes encouraged and con- 
trolled trade. 

It was an age of national distrust and national hostilities, 
but a passive trade was carried on between various nations, 
generally conducted by foreign traders. Charlemagne, by 
extending the boundaries of his territory, made it possible 
to encourage traffic in foreign goods. The Arab Moors at 
first greatly opposed traffic with the Orient, but subse- 
quently encouraged it, but it remained for the Crusades 
to acquaint the East with the West and open once more 
the trade of nations. 

The commerce of the Middle Ages reached its highest 
development through the Italian cities. The cities of 
Amalfi, Genoa, Pisa, Venice, and Florence, in southern 
Europe, were ready to take advantage of trade relations 
that sprang up between the East and the West; indeed, 
they began their great career by assisting in transporting 
the troops and goods of the Crusaders to Palestine. From 
this time on, the cities grew in wealth, Venice being the 
leader of all in trade. The Venetians had been natural 
sailors for five hundred years prior to the Crusades, hence 

6i 



ECONOMICS FOR HIGH SCHOOLS 

they were more ready than any other national group to 
take advantage of maritime trade. It is estimated that in 
the fourteenth century Venice had three thousand merchant 
ships, manned by twenty-five thousand seamen. The 
Venetians began their commercial career by supplying 
fish and salt to the world, in exchange for which they ob- 
tained food, clothing, and timber for their galleys; but 
their chief wealth arose from trade with the Orient. They 
brought the rich silks and manufactured articles of the 
Orient and exchanged them for products of western and 
northern Europe. The merchants of Venice thus had the 
advantage of an immense trafiEic, as the Venetians were their 
own carriers as well as the commercial carriers of other 
nations. As a consequence, wealth increased rapidly. 
Indeed, the history of the world shows that the nation 
which becomes preeminent in commerce usually develops 
its carrying trade along with it, and that the nation that 
obtains the supremacy of the carrying trade is very apt to 
obtain the commercial supremacy of the world. 

In conjunction with the trade of the Italian cities we 
have the organization of the Hanseatic League in the north 
of Europe. Independent cities entered into a league to 
protect their trade from pirates and to facilitate the ex- 
change of goods. The number of these cities finally 
reached eighty-five, of which Hamburg, Liibeck, Bremen, 
and Cologne were among the important ones. These 
cities were connected by inland trade with Italian cities, 
and while the cities of the League grew rapidly in wealth, 
their prosperity only added to the increase of wealth of the 
Italian cities, which were gateways to the Oriental trade. 

The Hanseatic League established rules for the regulatior 

62 



COMMERCIAL DEVELOPMENT 

of trade and developed commerce to a great extent. Pri- 
marily established to prevent piracy, to prevent the extor- 
tion of lords, and to stimulate production and trade, the 
League laid the foundation of mercantile law and began 
the policy of reciprocity and freedom. For four hundred 
years it was prominent in the control of commerce, and 
during this time practically monopolized the commerce 
of northern Europe. It maintained armies and navies 
and carried on war against kings. But its arbitrary power 
finally became intolerable and its existence a menace to 
trade. It began to decline in the latter part of the four- 
teenth century, and by the end of the fifteenth century it 
had lost its power. The decline of feudalism and the rise 
of national life, coupled with the . determination of each 
nation to control its own commerce, and the competition 
aroused by a developing trade, swept away all concessions 
and left the League helpless. 

55. Nature of Mediaeval Commerce. — The traders of 
the Middle Ages to a great extent disposed of their goods 
through markets and fairs which were established on certain 
days of the week. These originated from the fact that it 
would be advertised that a certain caravan or ship laden 
with goods would appear at a certain time, and in order 
to obtain the goods the people came from all parts of the 
country. As the cities developed, these became regular 
markets. Finally the traders who attended to the sale 
of these goods established regular shops to take care of 
the surplus goods. As trade became more extended and 
regular, these shops became continuous and the trans- 
porters delivered their goods to the shops. Gradually 
the shopkeepers became regular importers of goods. 

63 



ECONOMICS FOR HIGH SCHOOLS 

From that time on, the lines were gradually drawn between 
the wholesale merchant, importer, or jobber, and the 
retail merchants. The competition in trade led to various 
restrictions among the cities and towns engaged in trad- 
ing, and had a tendency to create certain privileges and mo- 
nopolies. There was much jealousy among the towns, 
especially among the Italian towns, and much rivalry, 
which caused bitter feeling. Their salvation, however, 
lay in the fact that they developed manufactures very 
rapidly. While the nations or countries that have the 
carrying trade of commerce have tremendous advantages, 
no nation has ever built up an extended commerce without 
having a large amount of raw materials or manufactured 
products to export to other nations. The gild merchant 
was one of the mediaeval institutions for the control of 
trade. It was a protective association which included all 
those who were engaged in buying and selling goods within 
a given tovvTi. Only those who were members of the gild 
had the privilege of trade. In this way local merchants 
protected themselves against traders of other towns and 
foreign traders as well. Following this protective idea, 
there came in vogue a body of laws and regulations of 
trade known as the " law merchant." Merchants made 
their own rules controlling trade, to suit their own needs. 
The " law merchant " was represented in several types. 
Besides the gild type, the law of the municipality, the 
central national law, and the law of voluntary, arbitrary 
bodies included the chief sources of the law merchant. It 
laid the foundation of mercantile law. 

In England the local gild merchant became prominent 
at an early period, but subsequently the foreign trade of 

64 



COMMERCIAL DEVELOPMENT 

England fell into the hands of foreigners. Real English 
commerce began at the appearance of the English traders, 
or " merchants adventurers," as they were called, who 
began to compete for the carrying trade. Originally the 
term was applied to merchants who undertook to export 
goods to new or unrecognized markets, or to merchants 
of various towns who were organized for their own pro- 
tection. Finally the company of "Merchants Adventur- 
ers " was incorporated, which became a powerful and 
wealthy association. In 1564 they received a royal charter 
from Henry VII., under the title of "The Merchants Ad- 
venturers of England." This gave a great impetus to an 
independent national commerce. 

56. Modem Commerce. — Mediaeval commerce resem- 
bled the ancient commerce in the concentration of trade 
in towns and cities. The chief difference existed in the 
more widely extended area over which it operated, having 
longer routes of travel and a larger number of stations. It 
also differed in the larger number of articles for exchange, 
arising chiefly on account of the development of manu- 
factures and the increased interchange of goods. Modern 
commerce, which may be said to date from 1492, is marked 
by oceanic transportation. It was the era of discovery 
and colonization. First, the invention of the mariner's 
compass gave an impetus to sea travel. The use of gun- 
powder brought new means of defense to commerce. The 
discovery of America opened up new inducements to 
oceanic travel, and the discovery of a route around the 
southern part of Africa to the East Indies, and another 
route around the southern part of South America to the 
Philippine Islands, opened up great ocean highways of 
F 6s 



ECONOMICS FOR HIGH SCHOOLS 

travel. This occurred at the period of the rise of 
modern nations. Portugal, Spain, The Netherlands, Eng- 
land, and France began to compete for the commerce 
of the world. 

57. The Mercantile System. — During the period of 
the rise of national commerce there came into existence a 
system of trade so important as to mark an epoch of his- 
tory. It has been known as the Mercantile System, and 
represents a doctrine of trade which has its advocates in 
modern times. Mercantilism was a distinct step in the 
evolution of commerce just as monarchy was in the evolu- 
tion of government. In the fifteenth century there was 
great confusion of trade, caused by the local jealousies 
and rivalries among the local and foreign merchants, the 
Merchants Adventurers and the Hanse Merchants. A 
movement was started which had a double purpose, to 
bring about unity in domestic affairs and to develop na- 
tional defense in trade. It was the monarchical principle 
applied to commercial affairs. It was a process of " state 
making and national economy making at the same time." ^ 
Mercantilism represents the transformation and reorganiza- 
tion of industrial society as well as the rise of national 
commerce. It not only transformed and united the 
municipal, industrial, and commercial interests, but set up 
barriers of trade against the encroachments of other 
nations. To subject local interests to national interests, 
and to advance the latter beyond the interests of other 
nations, were the prime motives of the mercantilist doctrine. 
In the subsequent development of mercantilism it stood 
for government restrictions on commerce and trade. 

' Schmoller, " The Mercantile System." 
66 



COMMERCIAL DEVELOPMENT 

Restrictions on imports or exports, limitation of the carry- 
ing trade to national ships, the tariff on exports and im- 
ports, and the attempt to make a favorable balance of 
trade so as to leave gold and silver in a given country, were 
some of the cardinal points in its later history. While 
defective in many of its general tenets, mercantilism was 
serviceable in building national life and national suprem- 
acy. It affected all nations, even The Netherlands, and 
later, Italy and Germany. In the nineteenth century there 
was a great reaction from the policy, especially in England ; 
but in more recent times it has revived, so that each nation 
seeks to protect its foreign commerce either by tariff, 
subsidy, or reciprocity treaty. 

58. National Competition. — Portugal at first became 
prominent and obtained a monopoly of the East India 
trade, especially in the trade in spices, but war with Spain 
furnished an opportunity for the Dutch, which they readily 
seized. The early maritime enterprise of Portugal, stimu- 
lated by the genius and daring of Prince Henry the Navi- 
gator, led to discoveries and an extended commerce. The 
result was the commercial supremacy of Portugal in India 
and China and the competition with the Dutch trade. At 
the opening of the modern period (149 5-1 521) Lisbon was 
the chief emporium for the distribution of Oriental goods, 
and Portugal reached her zenith of commercial power. 
The decline of her prestige in the East was followed by 
her forced union with Spain. After her freedom was 
obtained (1640), war with The Netherlands further weak- 
ened her power; but a commercial treaty with England 
resulted in the transference of her trade from the Dutch 
to the English and strengthened the already powerful 

67 



ECONOMICS FOR HIGH SCHOOLS 

nation. Spain had a tremendous trade in the Western 
hemisphere on account of her colonization and production 
of the precious metals. This gave her great prestige in 
the commercial world, but her pohcy eventually caused 
her ruin. She failed to develop home manufactures, and 
the silver obtained from America passed out of Spain into 
France and the Netherlands to pay for the manufactured 
articles used by Spain in home consumption and foreign 
trade. 

The rise of the Dutch, vi^hose central cities were Antwerp 
and Amsterdam, shifted the monopoly of trade to the 
Netherlands. They soon secured the monopoly of the 
East India trade from Portugal. The Dutch were thrifty 
people who understood the art of commerce. At home 
they not only developed manufactures, but established a 
system of banking and finance which was of great service 
on their own account and also on account of the commerce 
of the world. The Dutch had a strong mercantile policy 
which established great fleets for carrying on commerce, 
and they made commerce an end in itself; but their com- 
mercial development had extended beyond their national 
and political life, and therefore they were not able to hold 
their own in the competition of nations for trade. Subse- 
quently they lost this trade in the development of the 
English East and West India Companies, which came 
into competition with them and obtained a monopoly of 
the trade. 

59. The French and the English. — Down to the time 
of Henry VIII. the Lombard, Dutch, and Hanse merchants 
monopolized the most profitable branches of trade. In 
England, shipping was almost wholly in foreign hands, 



COMMERCIAL DEVELOPMENT 

but the Tudor kings had a special object in exalting wealth 
and the maritime power of England. A feeling of resent- 
ment continued to grow toward foreign merchants until it 
was expressed against the Hanseatic League, whose fac- 
tory at the " Steel Yard " operated independent of the laws 
and social order of England. It was in the reign of 
Edward VI., in 1552, that the shackles of British trade 
were broken by placing the Hanse factory on the same 
basis as other merchants so far as commerce duties were 
concerned. Subsequently, in the time of Elizabeth, the 
Steel Yard factory was closed. From this time on, British 
trade was promoted by every effort of government. The 
explorations and discoveries by the English during the 
sixteenth century widely extended commerce. Companies 
were formed for trade, including the East India companies 
and the Company of Merchants Adventurers. They con- 
trolled a large portion of the export trade, but the whole 
development of manufactures and trade was under a sys- 
tem of monopolies. These monopolies eventually became 
oppressive. 

But Cromwell, by the celebrated Navigation Acts of 
165 1, later suppressed private monopoly and made a 
gigantic monopoly of the British government. The law 
forbade the carrying of goods to or from England or her 
colonies in any except British vessels. As a result, ship- 
building sprang up, and subsequently a tremendous trade 
was developed ; but more than all, the great work of Eng- 
lish development during the Tudor period was made secure 
by these acts. In France the same system of restriction 
was instituted under Colbert, for mercantilism had culmi- 
nated in France more than in any other country. The 

69 



ECONOMICS FOR HIGH SCHOOLS 

idea prevailed that a country grew rich only through its 
trade balance, and every effort was made to secure the 
favorable balance of trade through the restriction of ex- 
ports and imports. But England had become mistress of 
the seas because of her immense carrying trade and the 
consequent development of her manufactures and agri- 
cultural products.^ 

60. Recent Comnierce. — The main courses of English 
trade continued to enlarge down to the end of the Napole- 
onic wars in 181 5, but a new era of commercial develop- 
ment seemed to date from this event. The industrial 
revolution, brought about by the introduction of power 
manufacture, changed the course of commerce by the intro- 
duction of machinery in the making of cotton and woolen 
goods ; the building of ship canals, the division of labor, 
the development of the factory system, the use of steam 
and water power, and the quickening of manufactures and 
of domestic commerce gave a great impetus to foreign 
trade in England and her commerce continued to extend. 
The introduction of the laissez-faire doctrine through the 
teachings of the early economists advocated the removal 
of restrictions on trade. The Physiocratic doctrine in 
France had a similar influence in that country. But 
nations that had ' gained such prestige under restrictive 
measures were able to advance without government aid. 
The commercial supremacy of England continued on 
account of her large manufacturing interests and her 
immense carrying trade on the ocean. This was aided 
by the repeal of the Corn Laws and the development of 
free trade. By these measures England had cheaper food 

^ See supra. 
70 



COMMERCIAL DEVELOPMENT 

with which to feed her army of workers. Having built 
up her commerce, having become mistress of the seas, 
having developed a foundation for manufactures, Eng- 
land entered upon free trade at the opportune moment. 
Her commerce and trade went forward with a bound. 

6i. American Carrying Trade. — In the nineteenth 
century America became England's great competitor 
in the carrying trade. Down to 1857 the carrying trade 
of the United States increased rapidly; since that time 
it has relatively declined. This can be attributed to 
several causes: first, the Civil War, which absorbed all 
the energies of the United States for several years, had a 
tendency to destroy merchant marine rather than develop 
it. England also has had an advantage in the construction 
of steel vessels since i860. The tariff has prevented a 
development of American shipping, and the immense 
internal improvement of the United States has absorbed 
capital that otherwise might have gone into the inter- 
national commerce. Yet, during this period, the United 
States has become the greatest export nation in the world. 
Her enormous supply of raw material, agricultural prod- 
ucts, and the recent development of manufactures under 
the administration of a protective tariff have advanced 
her foreign trade. 

62. Development of American Commerce. — Having 
recovered from the Civil War, the internal commerce of 
the United States began to expand and subsequently 
her international trade. Since 1885 she has become a 
formidable competitor of France, England, and Germany 
in the world's markets. She has become the greatest 
manufacturing nation in the world, as well as the greatest 

71 



ECONOMICS FOR HIGH SCHOOLS 

export nation. In 1905 the value of her manufactures 
was about fifteen thousand millions, or greater than the 
estimated manufactures of the United Kingdom, Ger- 
many, and France. The total value of manufactures 
entering the world's market is estimated at four thousand 
millions ; of this the United States supplies but five hun- 
dred millions, or i2|- per cent. It indicates that there is 
a vast opportunity for the United States to develop the 
exportation of manufactured goods. But the discrepancy 
between the amount of the product and the international 
trade is not necessarily indicative of an impoverished 
condition of the United States; indeed, it represents just 
the opposite. The rapid development of the United States 
has enabled her to absorb over twelve thousand five 
hundred millions of her own manufactures and to export 
less than five hundred millions. This is evidence of 
great wealth and prosperity; also, it is evidence of the 
principle that domestic commerce is of far greater im- 
portance to the nation than foreign commerce, and 
that periods of prosperity of the nation cannot be esti- 
mated by the amount of its foreign trade. Nevertheless, 
America is to-day in sharp competition with England, 
France, and Germany for the markets of the Old World, 
and for the newer markets of Africa, South America, and 
the Orient. 

63. Causes of Commercial Success. — The commer- 
cial success of a nation depends primarily upon the amount 
of raw materials and manufactured articles that it has to 
export after the home consumption has been abundantly 
supplied; upon transportation by land and water from 
the interior to the seaboard; a cheap and bountiful foodj 

72 



COMMERCIAL DEVELOPMENT 

supply for a thrifty and vigorous labor population; the 
development of the merchant marine, and the successful 
choice of trade routes whereby vessels may be laden with 
marketable goods for the return voyage. Moreover, it 
is necessary in modern times that merchants promote 
and advertise their interests in the countries in which 
they are seeking a market. The question, too, of the good 
will of nations is very important, and commercial treaties 
which promote favorable terms of trade are exceedingly 
valuable. The tariff may be a detriment to foreign trade, 
but it may also be used at times, like other restrictive 
measures, to temporarily promote the welfare of a nation. 
However, to the nation that has large resources of raw 
material and abundant food supply, first-class labor 
power, abundant opportunities for steam, water, and 
electric power, free international trade would be a great 
advantage in the long run. Some nations have advanced 
their carrying trade by giving subsidies to the ship com- 
panies. This may develop for a time the number of the 
ships owned by the exporting nation giving the subsidy, 
but in the long run it is detrimental to national welfare 
and development. 

64. Principles of International Trade. — Commerce is 
an instrument by which commodities are placed in the 
hands of consumers, and that system of commerce which 
will do this the most effectually and at the least cost is 
of greatest benefit to the consumer. In the thrifty nation, 
domestic commerce is of far greater importance than 
international. In modern times, through universality of 
invention, through steam and electricity applied to machin- 
ery, each nation becomes more and more self-sufffcient 

73 



ECONOMICS FOR HIGH SCHOOLS 

and independent in the supply of manufactured goodS;. 
The agricultural product is limited by the soil and climate, 
and a nation must import what it cannot raise. The 
exportation of the surplus goods of a nation has a great 
influence on its prosperity, but the power to consume 
all of its raw materials and manufactured products may 
be an evidence of greater financial prosperity, for it is 
only a small number of workers of any nation who are 
putting the labor power into products for international 
trade. It is estimated that between one fifth and one 
sixth of the wage earners of Great Britain are putting 
labor power into goods for exportation to foreign markets. 
Sooner or later, as all foreign trade must balance, the 
imports and exports of all the nations combined must 
be the same. There is a theory that the wealth of a 
nation is made by its trade balance and that the extent 
to which exports exceed imports is an evidence of national 
prosperity and power. But this is a false assumption, 
for if a nation imports goods, it is an evidence that it has 
means to pay for them and also assumes that there is 
some advantage to be gained in the importation of these 
goods. In other words, the nation that purchases abroad 
has added to its own stock of wealth ; on the other hand, 
it may be selling goods that might be consumed at home 
but are put upon the market to satisfy some more urgent 
demand of indebtedness. Yet, in the long run, a nation 
could not continue to import goods without loss unless 
it should have intervals of favorable export trade. How- 
ever, the international trade may benefit all nations 
engaged in it, just as domestic trade may benefit all indi- 
viduals engaged in it. The gains, however, in inter- 

74 



1 



COMMERCIAL DEVELOPMENT 

national trade, are of the same nature as the gains in 
domestic trade ; that is, they are merely relative. 

References. — Adams, C. C, "Commercial Geography"; 
Lynd, L. W., "Commercial Geography"; Price, L. L., "English 
Commercial Industry"; Trotter, Spencer, "The Geography of 
Commerce"; United States Statistics; Yeats, John, "The Growth 
and Vicissitudes of Commerce." 



75 



CHAPTER VIII 

MODERN INDUSTRIAL LIFE 

65. The Competitive Life. — Modern industrial life is 
founded on the competitive system. Each individual is 
devoting his energies to the occupation that he deems 
will yield the largest possible returns for his effort. He 
enters the industrial life with the trading power of capac- 
ity, energy, skill, and, if he have it, capital. Primarily 
he does not consider the welfare of those of his class with 
whom he competes. Indeed his aim is to distance his 
competitors in the struggle for existence or for wealth 
and power. Several laborers may be seeking the same 
place ; one is chosen and the others must find labor else- 
where. The merchant competes with fellow-merchant 
in buying and selling ; the banker competes with other 
bankers for the business of exchange; the manufacturer 
endeavors to undersell others by making a more attrac- 
tive article at a less price than others can make and sell 
it, and the great industrial and transportation companies 
compete with other similar companies or, indeed, attempt 
to monopolize industry and shut out competition. In 
general, all individuals who make up modern industrial 
society are in a general competition regardless of classes. 

Above this general competition is a special competi- 
•tion of groups of individuals. The family group, the 

76 



MODERN INDUSTRIAL LIFE 

primary unit of society, as a center of industrial activity 
competes for power and position with other groups. 
Business firms in a given occupation compete with one 
another; great corporations of organized capital and 
labor are competing with others of their kind. The 
railway and steamship companies compete with one an- 
other for traffic, and finally the great trusts, corporations 
of corporations, are in open competition. 

While all wage earners are competing with one another 
for position, the competition becomes intense when nar- 
rowed to a single industry, and it reaches its maximum 
when several are competing for the same occupation in 
a given factory. Thus, take a laborer at a puddling fur- 
nace in an iron foundry; he is in open competition 
with others of his trade in the same factory. If he is 
thrown out of employment on account of the excess of 
laborers, he seeks the same employment in similar indus- 
trial estabhshments. If there is no room for him, he 
must wait until an opportunity to labor occurs, or else 
he must seek employment in other occupations in which 
he is less skilled and failing in this, he must join the army 
of unskilled laborers to work at any occupation that of- 
fers. Whenever occupations are interchangeable, competi- 
tion occurs. Thus there is a general competition between 
the laborers of similar occupations in woolen mills and 
cotton factories, but the competition within the cotton 
or the woolen factories becomes specific and if a large 
number of laborers are seeking the same place, it becomes 
intense. The general effect of the division of labor is to 
render it immobile. Each laborer learning one trade 
is unfitted for others. But as the division and subdivi- 

77 



ECONOMICS FOR HIGH SCHOOLS 

sion of labor increases a laborer performs such a small 
part in any manufacturing or trading process that it takes 
him but a httle time to learn his duty. Thus extreme 
division of labor has a tendency to break down the bar- 
riers of the groups and to allow a laborer to pass more 
readily from one industry to another. Therefore, while 
the introduction of machinery and the organization of 
industry has a tendency to discourage competitive groups, 
because of the minuteness of the division, it makes it 
possible for the laborer to prepare himself in a short time 
for the occupation and to change more readily from one 
industry to another. 

66. The Coijperative Life. — While competition is 
the basis of industrial life, the cooperation of individuals 
is a necessary condition of stable society. This coopera- 
tion may proceed unconsciously by the individuals in 
competition. Thus the farmer works for the banker, 
the merchant, the commercial agent, the laborer, and 
all of the professional classes. His purpose, after supply- 
ing himself, is to furnish food for the laboring millions. 
But he could not do this if the laboring millions did not 
in turn furnish him with clothing, machinery, utensils, 
houses, and furniture. Likewise the manufacturer of 
boots and shoes receives in return for his services, food, 
clothing, and other necessaries and comforts. The com- 
mon laborer receives his food from the farm, his clothing 
from the factory, his fruit from the orchard, his fuel from 
the mine or forest, and his salt, sugar, pepper, from other 
sources. Counting all of the different groups of produc- 
ing, transporting, and exchanging industries involved, 
thousands are daily waiting upon him; for this service 

78 



MODERN INDUSTRIAL LIFE 

he gives his daily labor, or its equivalent in money. Thus 
all the members of a well- organized industrial society are 
waiting upon each other, are cooperating in transforming 
nature's resources into articles of use. 

In addition to this unconscious cooperation is a con- 
scious cooperation of groups. Thus when men contrib- 
ute capital and labor to obtain a given result which each 
share in proportion to service or money contributed, it 
is conscious cooperation. When men band themselves 
together to produce a given commodity for the market, 
or to buy and sell and share in the profits, it is conscious 
cooperation. The various productive and distributive 
cooperative societies, firms, banks, railway corporations, 
and manufacturing corporations are illustrative of this 
kind of cooperation. It is evident from the foregoing 
that industrial society is very complex and that all are in 
one sense serving one another, notwithstanding the real 
competition that exists. 

67. The Influence of Modem Invention. — The com- 
plexity of society has been greatly increased through the 
influence of modern invention. Life was simple indeed, 
when each procured his own food, clothing, and shelter 
independent of others. Gradually interdependence of 
members of society came about. Yet, it was not until 
the application of science and invention to the industrial 
world that the changes in this respect began to appear. 
The application of steam and water power to machinery, 
and more recently the use of electricity, have wrought the 
principal changes. The modern advancement of chem- 
istry and metallurgy and other applications of science to 
extraction and production have advanced rapidly the 

79 



ECONOMICS FOR HIGH SCHOOLS 

production of wealth and transformed the social processes. 
Modern methods of mining have enormously increased 
the output and use of the metals ; the use of clay and the 
rare earths have brought about wonderful changes in 
the arts of life. The gas mantel has revolutionized the 
method of lighting ; the manufacture of cement is chang- 
ing the method of building ; the large use of natural gas 
and oil have in many sections transformed industry. 

68. Relation of Scientific Discovery to Industry. — It 
is to the scientific laboratory that we look for new pro- 
cesses of treating minerals and earths; for the new appli- 
cations of electricity and other motor powers ; for the 
discovery of refined processes of manufacture, and for the 
appliances for the advancement of human welfare. While 
many inventions and discoveries of the past have been 
brought about by accident or necessity, the modern world 
looks to the scientific laboratory as its source of improve- 
ment. But invention in government, in law, in religion, 
in social organization, in industrial organization, keeps 
pace with scientific invention and discovery and their 
application to industry. 

69. Transportation. — Industrial life has been changed 
by the modern methods of transportation. The great 
steamship lines and railway systems encircling the 
earth furnish ready transportation for all the products 
of the earth and facilitate the travel of millions of people 
from place to place. The products of all climes may 
thus find their way into the small interior town and men 
may change their residence at will. So complete have be- 
come the exchanges of goods that transportation has 
become an essential feature of modern business. Con- 

80 



MODERN INDUSTRIAL LIFE 

stant effort is being put forth to reduce the cost of trans- 
portation by means of steam, electricity, and improved 
waterways. We are entering an electrical era of trans- 
portation, and soon a network of electric lines will cover 
every civilized country. To what extent it will replace 
steam cannot be foretold. 

70. Communication. — Increased facilities for trans- 
portation makes it possible to carry the metropolitan 
daily paper to the hamlet and the farmhouse and thus 
acquaint one part of the world with events taking place 
in all others soon after they occur. The telegraph which 
became essential to modern business is now supplemented 
by the telephone and the wireless telegraph, and renders 
the dissemination of knowledge well-nigh complete. The 
advantages of rapid communication to business, by 
acquainting all with the condition of the world's markets 
and quickening the movement of trade and industry, 
cannot be estimated. Moreover it serves to bind the 
world together in an industrial unit and to harmonize the 
complexity of industrial life. 

71. Organization of Industry. — With the improve- 
ment in facilities of production, transportation, exchange, 
and communication, has come the organization of indus- 
try. Gigantic enterprises are carried on in mining, manu- 
facturing, and the development of the resources of nature. 
This could not be carried on without organization. Cap- 
tains of industry with managers, superintendents, over- 
seers, and armies of laborers who make up the rank and 
file of industry are necessary. These are completely 
organized from the man at the head who controls millions 
to the office boy who runs errands. In the great army 



ECONOMICS FOR HIGH SCHOOLS 

every one has his place and his specific duty to perform. 
Each organization has a definite business relation to all 
others of similar nature . Likewise each local business center 
has a relation to all business centers, and the local market 
is absorbed in the organization of the world's market. 

72. Corporations and Trusts. — The trust is an essen- 
tial outcome of the unrestrained competitive system. It 
is a product of industrial evolution. First the business 
firm was established by people who combined their capital 
and services for an expansion of business enterprise. As 
this mode of business became large, it was incorporated in 
part for the protection of its business, but more especially 
for the protection of people with whom it did business. 
As business enterprise enlarged, the corporation became 
great, and with power came selfishness and to a certain 
extent irresponsibility. Then the sharp competition of 
corporations with one another caused them to combine 
to fix prices or to crush out competition. As industrial 
war was destructive, a corporation of corporations, or 
trust, was formed. Industrial development outran legal 
restraint and as a consequence the trust became a menace 
to trade and industry. Attempted regulation by law 
forced the trust, with its loose construction and its irre- 
sponsibility, into a gigantic corporation whose business 
is counted in hundreds of millions, when the old counted 
its enterprises in thousands of dollars. The secret power 
of the great corporation is its monopoly of business and 
its method of crushing out competition or doing business 
at the expense of other forms of business. The influence 
of organized capital in the control of the industrial enter- 
prise of the world has been constantly increasing. 

82 



MODERN INDUSTRIAL LIFE 

73. Labor Organization. — To protect itself against 
organized capital, skilled labor has organized. It seeks 
to advance wages, shorten hours of labor, and insure pro- 
tection of its members. It is a species of monopoly as it 
tries to control the labor market within a given field and 
to fix the price or wages of labor. To attain its ends it 
tries to keep down competition in a given territory. La- 
borers endeavor to meet the monopolistic power of organ- 
ized capital with the monopolistic power of organized la- 
bor. While they realize that capital is essential to modern 
productive processes, they know that nothing can be done 
without labor. They insist that capital has received more 
than its just proportion of the reward of industry and wish 
to force a larger return to the laborer. Thus two forces 
mutually essential are made apparently antagonistic. 
While it must be admitted that the organization of capital 
is essential to industrial life, and that labor has a right to 
organize and is benefited thereby, the conflict of these two 
great elements has become a burden to the consumer and 
to the business world at large. In the adjustment of 
economic relationships, this antagonism must cease to be 
destructive of the welfare of industrial society. 

74. Organization of Finance and Trade. — No other 
aspect of industrial society shows more clearly the genius 
of modern business than financial organization. The 
accumulation of the surplus wealth in the form of money 
makes it available for carrying on extensive industrial 
enterprise. The banks are founded independently, but 
so complicated and delicate are the methods of exchange 
that they work together harmoniously and sympathetically 
in the support of the financial enterprises of the world. 

83 



ECONOMICS FOR HIGH SCHOOLS 

They represent the nerve centers of business, and that which 
seriously affects one center is communicated to all of the 
rest. The clearing houses in the commercial centers 
handle the surplus credit paper of the whole industrial 
world. As money exchange becomes a crude method for 
large and world-wide exchange, the credit system takes 
its place. So that about ninety- five per cent of the business 
of the world is done through the credit system. It bears the 
same relation to the commercial world that steam power 
and electricity do to the industrial world. The commer- 
cial system permits the complete organization of finance 
and trade and further increases the unity of complex eco- 
nomic life. 

75. The Social Condition of the Laboring Population. — 
Judging from the material and immaterial things that 
the laborer has to enjoy, his present social condition is 
greatly improved in comparison with former industrial 
periods. Wages of skilled labor have kept in advance of 
the cost of living. Shelter and home comforts have 
increased. The organization of unions has tended to 
elevate the laborer socially. The introduction of low- 
grade and unskilled labor into communities through 
immigration has been a detriment to social conditions. 
The flow of labor from one country to another is in general 
beneficial when it follows the economic law of supply and 
demand, but when urged by competing steamship lines, 
and the inducements of great manufacturing and mining 
corporations who are seeking a cheap labor, it may prove 
a great detriment to the laboring population, and, indeed, 
to the nation. Labor pays its own way, and when the 
change of population is not too rapid, it creates wealth by 



MODERN INDUSTRIAL LIFE 

developing the resources of the country into which it 
flows. 

The facihties for education of the laboring population, 
the protection of women and children by wise factory laws, 
the facilities for travel, the improvement in dwellings, the 
making of parks and playgrounds, the summer outings 
for the children of laborers, the work of wise philanthropy, 
the larger activities of practical Christian workers, and 
the increase in temperance, are evidences of improved 
social conditions. Yet in the face of all this, over- 
crowding population in large cities has brought much 
misery and degradation. Thousands are without a living 
wage. 

76. The Shadow of Great Wealth. —The greatest 
human misery of to-day is found in the shadow of great 
wealth. In many instances wealth is accumulated at the 
expense of the laborer. In the long run this will be a 
detriment to wealth creating, for profitable and progressive 
industry demands a well-fed, well-cared-for, and contented 
laborer. But many capitalists and business managers 
possessed of insatiate greed for wealth care only for wealth 
regardless of the laboring population or the welfare of the 
community at large. The competitive system, without 
restriction, permits a few pirates of industry to take ad- 
vantage of the laborer's extremities and rob him of his 
just dues. If wages are good, their effect is frequently 
lost by irregularity of work caused by shutting down the 
factory or closing the mine by operators who are afraid that 
a surplus of goods will cause prices to fall. It is difficult 
to see how the system may be properly adjusted unless the 
producers shall be content with a smaller margin of profit 

85 



ECONOMICS FOR HIGH SCHOOLS 

or the consumers shall be willing to pay more for goods 
so as to give to the wage earner a fair proportion of the 
product of industry. There is wealth enough created to 
make everybody comfortable, if the system were properly 
adjusted. Much of the difficulty is with human nature, 
an element difficult to control. Much of it comes from 
an imperfect industrial system. To improve the former 
and adjust the latter may be accomplished by degrees 
through the triumph of industrial justice. 

77. The Relation of Industry to Politics. — The political 
life has more and more to do with industrial affairs. The 
great problems of modern society are industrial. Legis- 
latures and courts spend much of their time in the attempt 
to regulate industry. The majority of important laws in 
recent years have involved some great economic problem. 
The large body of laws regulating and protecting labor, 
those regulating commerce and trade, the multitude of 
government commissions to look after industrial and com- 
mercial affairs, are indications of the economic trend of leg- 
islation. The great corporations have their lobbies in nearly 
every statehouse to influence legislation in their behalf. 
The labor organizations are urging legislation for theirj 
protection. The problems of industrial life have reachec 
such an acute stage that it would seem that no one was 
fit to sit in legislative halls or upon the judge's bench whc 
was not well grounded in economic principles and in-| 
dustrial affairs. Indeed, our politics is becoming industrial 
and our civil procedure economic in nature. 

78. The Social Paradox. — In the first decade of the ' 
twentieth century people are experiencing a great social 
unrest which is becoming revolutionary in its nature. 

86 



MODERN INDUSTRIAL LIFE 

While the movement is less violent and spectacular, it is no 
less decided in action nor important in consequence than 
the religious revolt of Luther or the French or the Ameri- 
can Revolution. Thus far the revolution has proceeded 
quietly and in order, without violence and bloodshed, and 
it will doubtless so continue if the leaders in politics and 
business are mindful of the great public interests of the 
country. 

The central aim or purpose of this movement is the 
achievement of economic liberty and economic justice. 
It is a revolt against industrial oppression and " benevo- 
lent feudalism." The social difficulties to-day center 
around the methods of production and distribution of 
wealth. The real cause of the difficulty is the real or 
supposed injustice in the unequal distribution of wealth. 
It is a struggle for a higher standard of ethics in the busi- 
ness world. It is an attempt to apply the principles of 
freedom and justice already achieved in religion, in politics, 
and in science, to the business and social world. 

Evidences of this struggle are observed in the cry for a 
" square deal," the regulation of the relations of labor and 
capital; the agitation for railroad regulation; the passing 
of the pure food bill and the rate law; the regulation of 
trusts; the demand for a fair ballot, and in the revolt 
against all corporate greed. On the other hand, the tre- 
mendous gains of socialism, the great influence of the social 
agitator, and the growing distrust of government by the 
labor population are evidences of an unwholesome dis- 
content. 

In the attempt to regulate the social affairs by general 
law, we are confronted by a social paradox or the apparent 

87 



ECONOMICS FOR HIGH SCHOOLS 

conflict of two deep-seated principles of human conduct. 
In the first place, each individual, according to nature, 
habit, and social recognition, must look after his own 
interests. He entered the struggle for existence as an 
animal, he carried it on as a human being, and he con- 
tinues it in modern tim.es in the struggle for wealth. Pri- 
marily, he must look out for himself even though his fel- 
lows perish : therefore he competes with them in the race 
of life, in the struggle for existence, and in the accumula- 
tion of wealth. This method follows the law of organic 
evolution of the survival of the fittest. Carried to the 
extreme, it is common to the wolf and the tiger and is with- 
out any ethical principles. 

The other side of the paradox rests in the fact that the 
human species could not survive without cooperation. 
When man ceases to work for the interest of his fellows, 
the race is doomed to destruction. He is put in a position 
of competing with his fellows individually, but should his 
competitors perish he would perish with them. The very 
men that he is apparently working against are essential to 
his welfare, indeed, to his salvation. The struggle of 
modern social life is an attempt to settle these two appar- 
ently antagonistic forces. Where is the line of demarca- 
tion between individual effort on the one hand and social 
effort on the other? This is the question on which the 
real issue of modern times rests. If everything should be 
turned over to extreme individualism, the qualities of 
the wolf and tiger would predominate; a state of political 
and social anarchy would prevail, and society would destroy 
itself. On the other hand, should individualism be sup- 
pressed, and collectivism prevail, human progress and 



MODERN INDUSTRIAL LIFE 

human happiness would decHne, and eventually the human 
race would degenerate. 

The solution of the problem rests in the fact that it is 
possible for a man to be working for his own best interests 
and at the same time be working for the best interests of 
his fellows. Individual effort may be so regulated and 
controlled that community interests shall be conserved 
and advanced. Competition may be constructive or it 
may be destructive of social order. Constructive competi- 
tion may secure the individual interests and at the same 
time conserve social interests. Thus, competition in itself 
is a social blessing, but to be beneficial it must be just. 
It must combine the elements of cooperation. If men 
compete on one plane, they must cooperate on a still 
higher plane. 

References. — Holt, Henry, "On the Civic Relations" ; McVey, 
Frank L., "Modern Industrialism"; Wright, Carroll D., "Indus- 
trial Evolution." 



89 



i 



BOOK SECOND 
PRIVATE ECONOMICS 



I 



PART I 
CONSUMPTION 

CHAPTER IX 

THE SATISFACTION OP ECONOMIC WANTS 

79. Human Desires the Foundation of Economic 
Society. — The satisfaction of natural and artificial desires 
is the first cause of economic activity. While the science 
of economics is built upon the production of wealth, and 
the material activity of life apparently consists in this, the 
real object of this activity is the satisfaction of economic 
wants. What one sees is the labor, the competition, the 
ceaseless activity of man in the accumulation of wealth. 
Back of all this is the real motor power of progress, the 
satisfaction of human desire. The ultimate cause of 
economic life is thus traced to a psychological cause. 
Primarily, the first important desires, and those that have 
been constant factors in the development of economic life, 
are the desires to escape the pain of hunger and cold. For 
this, man has toiled to procure food, to increase the pro- 
ductive power of land, to build houses, and manufacture 
clothing. From these have radiated a thousand artificial 
desires more or less related to the primitive activities. By 

93 



ECONOMICS FOR HIGH SCHOOLS 

increased labor human wants have been created, causing 
excessive toil in their satisfaction. 

80. The Effect of the Desire for Food. — Let us con- 
sider for a moment what influences have been wrought 
by the simple desire for food. First of all, the vast agri- 
cultural activities of the country have been developed 
for this. The demand for vast amounts of agricultural 
machinery necessary for the tillage of the soil has caused 
the creation of implement factories. These in turn have 
caused the demand for metals from the mines and wood 
from the forests, causing two new industries. These 
dependent industries have employed an army of men and 
a vast deal of capital. The preparation of the food de- 
mands an army of cooks, and stoves and kitchen 
furniture. The preparation of the food for the market 
requires sacks for potatoes, rice, and sugar, barrels for 
apples, tubs for butter, and boxes for eggs. To transport 
the agricultural products from the farm to the market, 
requires horses and wagons, railways and steamships, 
calling into service new groups of laborers. Thus the 
simple matter of procuring food develops complex and 
varied industries. 

81. The Desire for Clothing and Shelter. — To protect 
the body from cold, clothing and shelter are necessary. 
In obtaining the former, wool, cotton, flax, and silk are 
produced, and these make new demands upon the agri- 
culturist. Spinning, weaving, and manufacture of gar- 
ments bring into activity new industries, with all of their 
accompanying demands upon other groups of laborers. 
The styles of clothing become essential, and artists of fash- 
ion are brought into the productive scheme. 

94 



1 



SATISFACTION OF ECONOMIC WANTS 

Likewise the desire for shelter develops a new line of 
economic wants. The building of dwelling houses, stores, 
warehouses, and public buildings, brings into action a mul- 
titude of groups of people of separate industries. Miners, 
foresters, manufacturers of lumber, cement, iron, and other 
products, masons, brick layers, carpenters, architects, and 
builders with other dependent groups are brought into 
economic activity. And again, merchants, transporters, and 
traders are called into service to help place the goods in 
contact with consumers. 

82. The Home Life. — Among the fundamental desires 
that have created the ceaseless economic activity is that 
for the home life. About the home have clustered many 
of the tenderest and best of social activities. Homes are 
built and decorated. Artistic taste demands a new line 
of activities. The desire for the eesthetic in home decora- 
tion and in clothing is not essential to the life of man, but 
its satisfaction is essential to modern civilization. The 
making of artistic furniture, wall decorations, pictures, 
and ornaments for the home employs an army of laborers. 
The decoration of the body, the demand for jewelry, and 
the products of the cosmetic industry have developed other 
groups of skilled laborers. 

83. The Desire for Education. — The intellectual forces 
are essential to the intense activity of the industrial life. 
Hence, men spend millions of dollars, which means a de- 
mand for armies of workers, in training the mind and ad- 
vancing science, and this increased mental activity turns the 
wheels of industry. More than this, the ideal of culture 
increases the demand for universities and schools and other 
means of advancement. But increased education multiplies 

95 



ECONOMICS FOR HIGH SCHOOLS 

the number of unsatisfied desires, and tlie economic world 
puts forth renewed energy to satisfy them. Thus the 
economic world is quickened at every turn by the active 
desires of the mind and body of man. 

84. Desire for Religious Culture. — There appears to be 
no cUrect relation of religion to the production and consump- 
tion of economic goods, but the development of religious 
ideas has made a demand for churches and church furniture ; 
and the development of religious ceremony has called for 
a large number of religious teachers and preachers who help 
to preserve and increase the labor power of the community, 
and in turn, by demanding economic goods for services, 
create a new demand for economic activity. 

85. The Demand for Wealth. — By wealth is meant 
economic goods. But the great struggle for wealth is a 
struggle for an excess of these goods, that other desires 
than mere consumption of food and clothing may be sat- 
isfied. Wealth is demanded because it satisfies economic 
wants. It is not money that men wish, but the things 
material and spiritual that money will furnish. More- 
over, wealth procures social standing and furnishes the 
opportunity for public approbation. It gives means of 
improvement: it furnishes culture and travel as well as 
the conveniences and comforts of life. It is the struggle 
for wealth that causes the great industrial organization of 
to-day. Banks, railways, factories, mills, and mines with 
their organized groups of managers and the multitude of 
laborers are but part of the machinery for the produc- 
tion of wealth. Labor organizations have been brought 
into existence because of the system of economic 
production. 

96 



SATISFACTION OF ECONOMIC WANTS 

86. The Demand for Social Order. — To protect the 
rights of individuals as well as their persons and property, 
it became necessary to establish a system of government. 
This demands large numbers of officials, a standing army, 
and a navy. These necessitate the building of courthouses, 
jails, arsenals, forts, etc. In an economic way, the people 
combine to build bridges, roads, and to develop the 
resources of nature. Social order is essential for the pro- 
tection and development of society. But it was mainly for 
the protection of wealth that the social order was fully 
developed. Even the government revolves around the 
economic life. Legislation in recent times has far more 
to do with industrial life than with any other subject. 

87. Complex Economic Life. — While the attempt to 
satisfy all human desires and needs has led to the develop- 
ment of a complex industrial life which mingles all inter- 
dependent social relations, political economy has to do 
primarily with the production of material goods to satisfy 
economic wants and to procure the services of men in 
return for this satisfaction. Economics has not for its 
scope the satisfaction of all human needs, but its province 
is to consider the consumption, production, and distribu- 
tion of wealth and the organization of industry attendant 
upon these processes. Wealth is its material, and eco- 
nomic social well-being its ultimate, object. 

88. Consumption of Economic Goods makes a Demand 
for their Production. — Wliile goods cannot be consumed 
until produced, it is the demand for consumption that 
has caused the building of economic society and the de- 
velopment of economic organization. While wealth pro- 
duction is the central idea of economics, consumption is the 

H 97 



ECONOMICS FOR HIGH SCHOOLS 

pivot on which the wheels of industry turn. For instance, if 
no one demanded shoes, there would be none manufactured. 
What one sees is the factory making shoes and the mer- 
chant selling them. But before the leather is purchased 
or the labor employed or the shoes made, the manufacturer 
first estimates the demand for the goods. In the fall, the 
retail merchant estimates the number of shoes he can sell 
in the spring, and the manufacturer receives his order six 
months before the goods are to be delivered. So for every 
other industry — ^the farmer, the manufacturer, the railway, 
the banker, make an estimate of the demand for goods 
based on the probable consumption before they begin to 
produce. When there is no longer a demand for goods at 
a fair remuneration, they will cease to be produced. 

89. Interdependence of Economic Society. — It will be 
seen, then, that the great industrial groups that appear so 
independent are really dependent upon one another. The 
manufacturer depends upon the farmer, and the farmer 
in turn upon the manufacturer, and both upon the banker, 
who is also dependent upon others. Laborer and em- 
ployer, manager and capitalist, are mutually interdepend- 
ent. While all are apparently in competition, they are 
essential to one another's success. There is an unconscious 
cooperation of all classes in the production and consump- 
tion of wealth. There is a conscious cooperation of 
many groups in the production and exchange of wealth. 
The great organizations in banking, exchange, trade, 
transportation, and manufacturing have for their purpose 
the production of wealth. The competition in modern life 
is centered more in the distribution of wealth than either 
in production or consumption. But society has become 



SATISFACTION OF ECONOMIC WANTS 

SO closely organized that the interests of the community 
and the individual are one. 

References. — Bullock, Charles Jesse, "Introduction to the 
Study of Economics," pp. 79-114; Seligman, E. R. A., "Principles 
of Economics," pp. 36-170. 

LOFC. 



99 



CHAPTER X 

NATURE OF CONSUMPTION 

go. Consumption regulates Production. — The amount 
of goods consumed is in one sense a record of the degree 
of satisfaction of wants, and as demand always springs 
from a desire to consume, in modern economic processes 
the amount manufactured will depend to a large extent 
on the amount demanded; hence, consumption limits 
production. While no goods can be consumed until they 
are produced, and the mechanical process of production 
precedes consumption, yet because of the desire to consume 
goods for the satisfaction of wants, consumption stimulates 
production. This principle may be observed in the causes 
and processes of panics. As soon as consumption falls 
off, or, indeed, as soon as a distrust arises that people will 
not consume what is produced, production ceases and 
there follows a trade depression. In the revival from 
panics it is the desire of goods, or consumption, which 
starts the wheels of industry. So important is this ques- 
tion of consumption in relation to production, that some 
authors have laid it down as the lirst principle in economics; 
however, it is only through the law of supply and demand 
that it takes precedence. 

91. Consumption is Inseparable from Production. — 



NATURE OF CONSUMPTION 

Whichever way consumption may be considered, it is in- 
separable from production. The whole economic structure 
rests upon the principle of the satisfaction of human wants. 
The effort of mankind to obtain material objects or goods, 
or the services of others in satisfaction of wants is the 
fundamental principle of the science. In the satisfaction, 
then, of these material wants, we find the formal basis of 
active life. The primary basis is the satisfaction of the 
merely animal wants, such as food, drink, clothing, shel- 
ter; these are the things that men strive for everywhere. 
As man's nature evolves, he finds it expanding into a thou- 
sand wants and desires, built upon the economic life as 
the formal basis of the superstructure of civilization. 
Men toil to satisfy the wants of religion, to promote the 
moral nature and the aesthetic faculties. Considering the 
social conditions of mankind, we find this idea expand- 
ing into railroads, highways, sanitation, education, public 
parks, institutions for the care of the weak, • — indeed, 
into all public needs which must be met by economic 
activity. 

92. Variety of Human Wants. — In the savage state 
man's wants are few, but it takes his entire life to satisfy 
them. As civilization increases, desires multiply, wants 
become innumerable, and renewed effort must be put forth 
to satisfy them. By increased intelligence, which enables 
man to use the power of invention and to apply the forces 
of nature, he is enabled to multiply the means for the satis- 
faction of wants. We seek everywhere for the qualities 
embodied in material objects to satisfy our needs. We also 
seek the personal services of others. We desire food and 
clothing and objects of art and beauty, and so, on the other 



ECONOMICS FOR HIGH SCHOOLS 

hand, we desire to travel and to employ the services of 
others in conveying us from place to place. 

93. Degree of Want. — Each individual arranges his 
wants in the order of their importance, but the degree of 
importance of the wants of different individuals varies. 
The chief desire of one man may be for a coat, of another 
for warm food, while the chief demand of a wealthy per- 
son may be a thousand-dollar painting or a five-thousand- 
dollar horse. The degree of intensity with which people 
desire certain things has a vast deal to do with the regulation 
of the kind and amount of consumption, as well as the 
establishment of the prices of products. As civilization 
progresses, there is comparatively less time spent in obtain- 
ing the bare necessaries of life, such as food, clothing, and 
shelter, and more, proportionately, in obtaining those things 
which lead to intellectual culture; that is, more spent in 
the development of the derivative qualities of mankind. 
In an actual social organization, education, art, and litera- 
ture may not be essential for the perpetuation of life or to 
the perpetuation of the species, but they are essential to 
the higher development of the individual and of social life. 
To that extent culture is desirable, for it produces a better 
life and a better class of people. 

94. Satisfaction of Economic Wants. — In Political 
Economy we have to deal with only the satisfaction of 
economic wants, chiefly material goods. Such goods as 
nature has furnished in abundance, like water, air, and sun- 
light, are not economic goods, because they are not sub- 
ject to the processes of economy. However, these have a 
tendency more and more to be appropriable in service or 
material. For example, water in the cities has become 



NATURE OF CONSUMPTION 

an economic good; also, for the purpose of irrigation, it 
is bought and sold. It may be that the service performed 
is the chief consideration, but in reality it is the furnishing 
of the economic good that determines the economic condi- 
tion. Air pumped into mines and tunnels may become 
an economic good as it is bought and sold in the market, 
and has, under such circumstances, an economic value 
the same as food or clothing. If sunlight should be 
concentrated so as to run engines, power might be developed 
in that way, and sun heat would become an economic 
good. Electricity, which is free to all everywhere, when 
generated and transmuted into power, becomes an eco- 
nomic good, and electrical power is bought and sold. 
So we shall find that in the process of development man 
enlarges his sphere of activity from time to time, and the 
list of purely economic goods becomes enlarged, and goods 
which were formerly free become economic. 

95. Immediate Consumption and Final Consumption. 
— All goods are produced for the sake of consumption. 
Some of these are for immediate consumption in the grati- 
fication of wants, such as food for the sustenance of life, 
or raw material for the production of other goods, as coal. 
Final consumption is the last use of an article, and means 
the last use it is put to in the development of the economic 
process. Thus, trees are consumed in furnishing lumber; 
lumber passes through the planing mill and subsequently 
is made into articles of furniture. But the use of the furni- 
ture is the last use or final consumption of the lumber, 
and its final consumption represents the destruction of the 
utility. Again, the consumption of wealth is necessary 
for the production of other wealth. Thus, that portion 

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ECONOMICS FOR HIGH SCHOOLS 

which is set apart for the furnishing of means for produc- 
ing other wealth is called capital. Its object is production, 
and it is to be consumed in the process. 

96 . Productive Consumption. — Productive consumption 
is that in which the value reappears in the utility of the 
finished product. Thus, coal used in creating power passes 
through the process of being consumed and reappears in 
the value of the finished product. The coal which is used 
for heating purposes only is consumed in the final act; 
it has served its economic process there. But the eco- 
nomic process in production is entirely different. Many 
goods serve as raw materials in the manufacture of finished 
products; also tools and machines are consumed in the 
production of other articles, the ultimate aim of the whole 
process. The consumption of goods by the laborer is 
sometimes said to be productive consumption, but this 
can only be true in the case of the consumption of such 
articles as are a necessary part of the process of produc- 
tion by the laborer. For consumption by man is the aim 
of all production; when goods have been consumed 
thus, their economic purpose is fulfilled, unless otherwise 
intended, 

97. Consumers' Profits. — In consumption all are 
looking for the largest use of material goods. Producers 
create goods for the purpose of selling in order that they 
may realize a margin of profit. The consumers buy them 
in the cheapest market with the expectation of obtaining 
some advantage in buying. There is always competition 
in buying as well as competition in selling. While those 
selling hope to make good terms for themselves, those buy- 
ing desire to retain the advantage on their side. Thus, 

104 



NATURE OF CONSUMPTION 

competition tends to reduce the purchasing price, which 
would yield a profit to individuals. All distributive co- 
operative institutions have for their purpose the making of 
profits, which arise from careful purchasing by the con- 
sumer. 

References. — See the following chapter. 



loS 



CHAPTER XI 

CONSUMPTION AND SAVING 

98. Analysis of Consumption. — It is held by some that 
consumption, being essentially an entire destruction of 
utilities, is always accompanied by a saving process or 
economy of expenditure. Hence, people are always seek- 
ing the most advantageous use to which wealth may be 
devoted. They wish the largest return possible of money 
expended, and try to make the articles purchased last as 
long as possible. In manufacturing, this same economy 
exists in the concrete processes of production. However, 
in the use of raw material its transformation into the fin- 
ished product is made as rapidly as possible, while the 
machine that does the work is made to last as long as possi- 
ble. There could be a better ordering of the methods of 
consumption without any real retrenchment in the amount 
consumed, but it requires a careful study as to what should 
be used. Ordinarily, consumers are very deficient in the 
art of buying and the economy of use. Economy in con- 
sumption is a very important subject; and by that we do 
not necessarily mean abstinence or niggardliness, but a 
careful and thoughtful study of how to get the largest 
return for the expenditure. 

99. Engel's Law. — A careful study of the statistics 
of consumption shows that there is a relative order of 

106 



I 



CONSUMPTION AND SAVING 

expenditure for different individuals. Various investiga- 
tions have taken place in Europe and America to show the 
relative per cent of income expended in the different ways 
for food, clothing, rent, fuel, etc. The first definite results 
of investigations were, published in 1867 by Dr. Schwabe, 
chief of the Municipal Statistics Bureau of Berlin, on the 
relations between rent and income. The following table 
summarized his results: — 



When the Income is 

900 marks 

1,500 marks 

2,250 marks 

3,000 marks 

4,500 marks 

6,000 marks 

9,000 marks 

15,000 marks 

30,000 marks 



Then the Expenditure for Rent is : 



216.09 marks, or 24.10 per cent 

231.65 marks, or 22.10 per cent 

450.00 marks, or 20.00 per cent 

825.50 marks, or 27.50 per cent 

1,052.55 marks, or 23.39 P^r cent 

1,203.60 marks, or 20.56 per cent 

1,566.00 marks, or 17.40 per cent 

2,020.50 marks, or 13.47 per cent 

2,760.00 marks, or 9.20 per cent 



This social law, which states that "the greater the income, 
the smaller is the proportion expended for rent," has often 
been called Schwabe' s Law. Later, Dr. Engel, of the 
Royal Prussian Bureau, extended this " social law" to all 
the necessaries of life, and in its more expanded form the 
law is usually called "Engel's Law." 

As income increases, the relative expenditure in the 
different lists changes; but there are certain constant laws 
of relations of expenditure derived from statistics. These 
are mainly as follows: First, the law of constant per- 
centage : as income of the family increases, the percentages 
of expenditure for clothing remain approximately the 
same, and expenditures for rent, fuel, and light remain 
invariably the same. Second, the law of variation: as 

107 



ECONOMICS FOR HIGH SCHOOLS 

the income of the family increases, a smaller percentage 
of it is spent for food and a steadily increasing percentage 
is expended for education, health, recreation, amusement, 
etc. 

In a large number of cases in Germany it is shown that 
the per cent spent for clothing ranges from i6 to i8, in 
Europe 14.8 to 19.8, while in the United States the cloth- 
ing expenditure ranges from 12.82 to 16.84, showing a 
slight variation in the changes of income. While the ex- 
penditure for rent in the United States is from 12.59 to 15.98 
per cent of the income, it is from 9.38 to 11.93 ^^ Europe. 
It is seen by this that the subject of rent varies somewhat, 
though it may be regular enough w^ith clothing to be in- 
cluded in the constant or relatively constant laws. The 
amount of food used varies from 50 to 62 per cent of in- 
come in Germany, 44 to 50.06 per cent in all Europe, and 
28.63 to 49.64 per cent in the United States. The fol- 
lowing tables illustrate these laws. They also point out a 
great lesson in social economics : that the wants of higher 
civilization caused by education and a higher standard of 
life are not satisfied with the present economic or industrial 
system. Yet the ordinary family still has insufficient 
income over the bare necessaries to satisfy desires to the 
extent of producing happiness and contentment. If the 
individual is to satisfy common wants and to have a 
margin for the satisfaction of extra desires, the reform 
should begin with consumption. 

It will be interesting to study the following compara- 
tive percentages of expenditures of the families of work- 
ingmen in Illinois, Massachusetts, Great Britain, and 
Prussia : — 



CONSUMPTION AND SAVING 

PRUSSIAN STATISTICS ; ENGEL'S LAW 



Items of Expenditure of a Fam- 
ily of the Middle Class 


Percentage of the Expenditures of the 
Family of a Man with an Income of 
from 




$225 to 
$300 


$450 to $600 


$750 to $1000 


Subsistence 
Lodging 
Clothing 

Firing and lighting 
Education, public worship, etc. 
Legal protection 
Care of health 

Comfort, mental and bodily 
recreation 


Per cent 
62.0 
12.0 
16.0 

S-o 
2.0 

I.O 
I.O 

I.O 


Per cent 

55-0 

12.0 

18.0 

5-0 

3-5 
2.0 
2.0 

ii.o 


Per cent 

50.0 
12.0 
18.0 
S-o 
S-5 
3-° 
3-0 

3.S 


Total 


1 00.0 


100. 


TCO.O 



Percentage of Expenditure for Families of Different Incomes 





Income 


Income 


Income 


Income 


Income 


Income 


Object of 


$300 


$500 


$700 


$900 


$1200 


Expenditures 


$200 


to 


to 


to 


to 


■ and 




$400 


$600 


$800 


$1000 


over 


United States 


Per cent 


Per cent 


Per cent 


Per cent 


Per cent 


Per cent 


Rent 


15.48 


14.98 


IS-I5 


15.60 


14.96 


12.59 


Fuel 


7.07 


6.04 


5.63 


4-42 


4.00 


2-57 


Lighting 


1. 01 


.98 


•97 


.88 


•74 


-45 


Clothmg 


12.82 


14.14 


15-27 


16.33 


16.84 


15-71 


Food 


49.64 


4S-59 


43-84 


38-89 


34-34 


28.63 


All other pur- 














poses 


13.98 


18.27 


19.14 


23.88 


29.12 


40.05 


Europe 














Rent 


9-38 


11-93 


10.26 


9-49 


10.49 




Fuel 


5.38 


S-49 


3-32 


3-97 


5-19 




Lightmg 


1.66 


I-S9 


^•37 


1.20 


1-53 




Clothing 


19.08 


14.18 


15.21 


18.97 


14-15 




Food 


48.32 


49-S8 


50.06 


44.00 


46.24 




All other pur- 














poses 


16.18 


17.23 


19.78 


22.37 


22.40 





^Should be 2.5 to make even per cent. 
109 



ECONOMICS FOR HIGH SCHOOLS 



Items 


Illinois 


Massa- 
chusetts 


Great 
Britain 


Prussia 


Average 


Subsistence 


41.38 


49-28 


51-36 


S5-00 


49-25 


Clothing 


21.00 


15-95 


18.12 


18.00 


18.27 


Rent 


17.42 


19-74 


13-48 


12.00 


15-66 


Fuel 


5.63 


4-30 


3-50 


5.00 


4.61 


Sundries 


14-57 


10-73 


13-54 


10.00 


12.21 


Total 


100.00 


100.00 


100.00 


100.00 


100.00 



While the table shows in a rough way the comparative 
percentages of expenditure, in another way it determines 
but little. Take the item of subsistence, for example: 
it is not shown whether the family in Great Britain that 
expends 51.36 per cent of the income for food is better or 
worse fed than the family in Illinois that spends 41.38 
per cent for the same, but it shows that the largest item of 
expense in Great Britain is food. The table shows that 
rent is a greater item of expense in Massachusetts than in 
Germany or Great Britain, but does not show how the 
family lives. While there is a tendency everywhere for 
a family of certain grade to seek the same relative home 
comforts in proportion to income, it is not sufficiently 
constant to show any positive relation. Are rents higher 
in Massachusetts than in Great Britain for the same 
quality of house? 

100. Inducements to Save. — Inducements that persons 
have held out to them for saving are, that the same articles 
may be consumed in another way, yielding a larger amount 
of satisfaction. When the standard of life is once estab- 
lished, it requires a certain amount of various articles to 
satisfy it. If the standard is raised, there must be a larger 
expenditure in certain lines for its satisfaction. Economy 
in this respect consists in saving from useless or needless 



CONSUMPTION AND SAVING 

iexpenditure, with the expectation of receiving a larger 
benefit from the goods expended in some other way. 

10 1, Spending and Saving. — There are those who hold 
to the doctrine that spending should be practiced freely 
in order to make times good ; that is, the more we spend, 
the greater will be the circulation of money and the better 
will trade be. This, however, has its limitations. Money 
expended in the gratification of rational wants, it is true, 
will lead to rational production and proper consumption; 
but money or wealth expended in uselessness may create as 
much evil as good, and if all were to squander alike with 
prodigality there would be no wealth used for the purpose 
of carrying on the processes of production. In its general 
use luxury is a relative term, but in an economic sense it 
must be confined to extravagance and prodigality. There 
is no general law telling what luxury is, for luxury to one 
person might not be luxury to another. The luxuries of 
one individual may be the commonplace articles of an- 
other, and the luxuries of one generation may become the 
necessaries of the next. The money that is expended in 
riotous living is a direct waste, and the money that is 
expended in excessive luxury might be used in such a way 
as to bring a larger return to society. The millionaire's 
palace might build a hundred good homes for people of 
ordinary means and taste, and it is a question whether 
the owner of the palace demands any such outlay, or 
whether, indeed, it is necessary for his best interests. 
Viewed in this light, it appears that much of the expendi- 
tures of life are useless. The luxurious wine supper cannot 
yield a sufficient pleasure for the amount of waste incurred, 
hence it is a luxury. Whisky, beer, and tobacco are worse 



ECONOMICS FOR HIGH SCHOOLS 

than luxuries, — they are a waste, because of the evil 
effects on the body. The wants of a community are never 
satisfied, for as we go on developing we increase the num- 
ber of our unsatisfied desires, which are limitless. Luxu- 
rious expenditure can only be justified when results are 
obtained in proportion to the sacrifice. A man might burn 
a house for the sake of amusing himself with the play of the 
flames, but it is evident that the small amount of gratifica- 
tion has cost a very large expenditure, and is out of all pro- 
portion to real economic consumption. Though the house 
were his own, he would violate moral obligations in con- 
suming materials which had cost years of labor and might 
be made useful in many ways. 

102. Economic Expenditure and Waste. — The person 
who, having to consume useful articles, does this in a care- 
less and wasteful manner, violates his moral obligations 
to the community. Hence, the human race would be 
greatly benefited if we could have economy of food con- 
sumption. Now, economy of food consumption does not 
mean that the body should be stinted, but only means that 
economy should be used in the selection of food and in its 
proper preparation and use. Thus we should have the 
largest return for the expenditure. This is what is meant 
by saving; it is not hoarding articles for the purpose of 
gratification of bare possession, but for the purpose of 
seeking out the largest return for goods in hand. There- 
fore, when persons put money in savings banks, it is for the 
purpose of getting a larger return in some other way than 
by the gratification of present desires. If a person re- 
frains from buying a hat when he does not really need it, 
it is for the purpose of spending the money for some want 



CONSUMPTION AND SAVING 

yet unsatisfied. Hence, saving is a relative term, and 
economy is economy in use. In the use of food, for in- 
stance, there might be selected expensive foods contain- 
ing little real nutriment; or, foods might be selected 
which would not satisfy the wants of the family; or, 
food could be w^asted, badly prepared, or thrown away; 
and, again, there might be a great deal of expensiveness in 
its preparation. All of these things are absolute waste. 

103. The Desirability of Saving. — There are very 
many reasons why saving represents an economic advan- 
tage. It teaches the individual thrift and frugality, in- 
cluding habits of caring for himself, which is an insurance 
against the destruction of labor by poverty and sickness. 
It is an insurance against reverses in business, which tides 
the individual over in times of apparent stress, but it also 
enables the use of large amounts of wealth in a productive 
enterprise which otherwise would be consumed at once. 
Nevertheless, the question of saving may be carried too far, 
for if one continues to save to the detriment of his every- 
day business or his everyday work, it may be in the long 
run a hindrance to economic progress. Sometimes saving 
is carried on to the extent of impairing a business by di- 
verting free capital from one channel into another. Exam- 
ples of this Icind are found where excessive life insurance 
is taken, or where a business is entered which requires 
excessive payments or assessments. 

It is sometimes argued by individuals that it is a good 
thing to spend, because it puts money into circulation and 
makes times good. While this is not a good argument 
taken as a whole, there are elements of truth in it. A com- 
munity may be crippled by diverting free capital into chan- 
I 113 



ECONOMICS FOR HIGH SCHOOLS 

nels for the purpose of yielding an ultimate benefit, but 
which in reality is at an expense to prosperity. If there is 
a large amount of manufactured goods on the market, the 
consumption of these goods will have a tendency to quicken 
the wheels of industry in old established lines, and create 
a surplus of income which may be used to create new busi- 
ness. But if by strict economy living expenses were cut 
down one half, consumption falling off to the same extent, 
in order to save this amount from a given enterprise to ex- 
pend in another business which would take years for an 
income, it is plain that the community would suffer loss. 
It is a good thing for a community to live well, to keep up 
the standard of life, for this is true economy. Such savings 
as may be had over and above this good living will not 
only be an immediate but an ultimate advantage to the 
community. 

104. National Consumption. — National consumption is 
a better estimate of national prosperity than national 
production, if different groups of individuals are consid- 
ered. It is what an individual has and enjoys that esti- 
mates his standard of life. When we say that the per 
capita wealth of the community is $1000, we mean that the 
accumulations or savings of wealth amount to that much. 
Now, in what form do we find this wealth ? It is in money, 
lands, houses, furniture, clothing, books, machinery, im- 
plements, etc. It means that we have that amount at 
hand not consumed. Nevertheless, nearly all of this is 
in the process of consumption. If all of these goods could 
be stored in a warehouse awaiting the use of the people, 
and there was no demand for them, it is easily seen that the 
wealth of the community would be small. It is through 

114 



CONSUMPTION AND SAVING 

consumption that the value of all goods is estimated. If 
consumption were to keep up with production, day by day, 
there could be no such thing as national wealth, and from 
the fact that consumption does not keep up with produc- 
tion we have a surplus on hand which is called capital. 
This accumulation is dependent upon the excess of produc- 
tion over consumption. 

It still remains true that the prosperity of a nation is 
dependent upon the perpetual use of this wealth in legiti- 
mate consumption. In other words, the condition of 
national consumption, that is, the use of all the surplus 
earnings of a nation, will be an index of the national pros- 
perity. Hence it is the height of economy to encourage 
legitimate consumption of goods. Therefore the legitimate 
consumption of wheat, corn, clothing, furniture, houses, 
and, in fact, all goods, will be an index of the prosperity 
of the nation. Care should be used to discriminate be- 
tween the large service of goods and the waste of goods. 
Everything must be put to its highest possible use if we wish 
to reach the highest prosperity. If a large part of the sur- 
plus earnings of a community passes into savings, it may 
thereby curtail expenditure in such a way as to destroy 
the well-being of the community. While the encourage- 
ment of saving by individuals in the form of life insurance 
or laying up funds for future use may in the long run lead 
to greater opportunities for the support and production of 
life, yet even this may be overdone to the extent of destroy- 
ing the working funds of the community and detracting 
from its well-being. 

In the United States, enormous consumption of goods 
has as much to do with the prosperity of the nation as the 

"5 



ECONOMICS FOR HIGH SCHOOLS 

excessive industrial power which produced the goods. 
While the opportunity to consume goods must logically fol- 
low the production of the goods, it is after all the stimulus 
to production and the evidence of the well-being of the 
community. The following table illustrates the national 
consumption of certain classes of goods, in the United 
States, for the year 1906: — 



Article 


Production 


Home Consumption 


Wheat 


552,399,517 bu. 


510,985,324 bu. 


Wool 


295,488,438 lb. 


542,062,536 lb. 


Cotton 


6,994,281,731 lb. 


2,749,291,082 lb. 


Sugar 


584,888 tons 


2,632,216 tons 


Corn 


2,464,480,934 bu. 


2,377>202,894 bu. 


Pig iron 


22,992,380 tons 
(Calendar year 1904) 


16,561,277 tons 


Coal 


314,562,881 tons 


244,051,103 tons 
(Bituminous) 


Malt liquors and 






distilled liquors 


1,718,203,292 gal. 


1,694,392,765 gal. 



It is evident that the large amount of the consumption 
of liquors must be to a great extent a detriment rather than 
an advantage. And all the waste in the use of flour or 
meat in the home consumption should be considered in an 
estimate of well-being, yet the entire home consumption 
represents the possibility of well-being to the nation. 

105. Reform in Consumption. — As consumption in- 
fluences production, the improvement of economic methods 
will be more readily made by reforming our system 
of consumption. There is competition in buying or con- 
sumption as well as in selling, and the consumers who com- 
pete perpetually for lower prices influence manufacturers 
in making a cheaper article. A retail dealer in shoes was 
one day asked why he did not furnish a better quality of 

116 



CONSUMPTION AND SAVING 

children's shoes. " Simply because," he said, " the people 
do not wish to pay the cost of their making. Children's 
shoes are defective in manufacture to a large extent, and 
as a child's shoe costs more than a grown person's shoe in 
proportion to the material in it, parents are not willing to 
pay the actual cost of a well-made child's shoe. They 
alw^ays ask when shown a certain grade, ' Have you some- 
thing cheaper ? ' Then the dealer says to the manufacturer, 
* Can you not furnish me something similar to this of a 
much cheaper grade, to supply the demand ? ' " And so 
the cheaper shoe is made. 

Thus competition in buying is productive of adulterated 
goods in almost every line. Goods are made in these days 
to suit not only the volume of trade, but also the tastes 
of the consumer. If we demand substantial, well-made 
goods, in which there is no cheat or deceit, we must be 
willing to pay the cost, of production with a ihargin for 
handling the goods. In other words, we must have healthy, 
well-fed laborers, working under a high standard of life, 
which means high wages and a fair price for the goods. 
Consumption can influence production to a considerable 
extent. It is not intended here to argue against the small 
cost of articles, for this is a blessing to the poor. The ap- 
plication of modern invention and machinery to the produc- 
tion of goods permits us to produce substantial, well-made 
articles at a low price and by fair wages. But the excessive 
cheapness of manufactured articles is to be avoided. 

io6. Sweating System. — There is what is known as the 
sweating system, or the method of taking articles to be 
manufactured in the homes or in small, dingy apartments, 
on a contract to do so many pieces at a certain very low 

117 



ECONOMICS FOR HIGH SCHOOLS 

price. The prices paid for labor are so low under such 
circumstances that work must be slighted in order that 
people who consume these goods will have a cheap article. 
In the long run, this cheapness is a detriment to both con- 
sumers and producers, as well as laborers. If it yielded 
an ample return to the consumer, there might be a grain of 
sense in forcing the producer to compel the laborer to create 
the cheap article designed. But this cheapness is of no 
benefit to the consumer, because it gives virtually an article 
without service at a low price. Consumers scarcely think 
of this when they go to the stores to purchase, with a ten- 
dency to beat down the prices of goods to the lowest notch, 
— that is, demanding cheaper and cheaper made goods. 
To avoid this, " consumers' leagues " are formed to pur- 
chase goods made by reliable houses where labor is paid 
full living rates, and to avoid the purchase of all sweat- - 
made garments, which are created under the influence of 
poverty and wretchedness of low-grade labor. 

107. Waste in Consumption. — It is a difficult thing to 
purchase goods properly in the market to satisfy our own 
immediate wants. Our wants are so many and so varied 
that with limited means we must weigh the possibility of 
satisfying first one, then the other. This is especially true 
among the poorer classes. They cannot always tell what 
they want the most, or if they can, in their purchases they 
frequently fail in getting what they want. To be a good 
purchaser in the market with modern competition, it is 
necessary to know what one wants, and then to estimate 
the ability to pay for it before the purchase is made. 
, But having purchased the article, its use for consump- 
tion is of even greater importance. Take, for instance, the 

118 



CONSUMPTION AND SAVING 

food that is brought into the kitchen. In the first place 
there is lack of economy in its preparation and in its cook- 
ing, and finally in its actual consumption. The Americans 
are proverbially extravagant, wasteful people in this re- 
spect. It is said that they waste enough to support another 
population equal to their own. This comes about not 
entirely through carelessness, but through lack of knowl- 
edge and training in the art of consumption. A farmer 
will leave his implements out in the storm the year around, 
and then complain of hard luck. He will leave his cattle 
without shelter and poorly fed, and then wonder why he 
loses in the business. We waste in clothing by our per- 
petual change in fashion, and we wear our houses out long 
before their time, because we refuse to keep them in proper 
repair. And so for all that we use in life there is a waste 
in consumption. 

It is not that we desire to have a small consumption of 
goods, for it is highly desirable that there should be a large 
consumption; but it is only through economy that we are 
permitted to have a large consumption. If Mr. A takes 
care of one pair of boots, he may have sufficient wealth to 
buy a hat or a coat which he otherwise would not be able 
to purchase, or else he may invest his money in a better 
way. With economy of the flour and potatoes already pur- 
chased, people might purchase in addition apples and other 
desirable things. 

Great care should be exercised in the selection of inex- 
pensive foods that have a large amount of nutriment and 
that are not easily perishable, and to avoid extravagant 
foods with little nutriment. The art of making palatable 
combinations of foods that suit family needs is not well 

119 



ECONOMICS FOR HIGH SCHOOLS 

learned. There is likewise a great waste in the preparation 
of food, and a loss in bad cooking, as well as in the method 
of eating. Experiments carried on by officers of the United 
States army at Omaha demonstrated that, by observing 
economy in all things, a laboring man could be well fed 
and satisfied on an expenditure of fifteen cents per day. 
Other signs of waste are seen in the needless destruction of 
kitchen furniture and the needless consumption of fuel. 
It will be observed that the economy of consumption should 
begin with the purchasing of articles for the household. 

This principle is frequently carried into the process of 
production. Business firms seeking to enlarge their 
production and increase their income frequently lose be- 
cause of their excess of expenditures, simply because their 
processes of consumption were imperfect. This waste 
of material is frequently found in every department of 
economic life. As business becomes more exact, there is 
greater care in consuming all of the material. The by- 
products in a gas factory or in a smelter frequently yield 
a large revenue. The saving of cotton seed, which for- 
merly was wasted, adds much to the productivity of cotton 
fields. The large packing houses are good illustrations 
of the economy of consumption, for every part of the 
slaughtered animal is saved and turned to economic use. 

References. — Bullock, Charles Jesse, "Introduction to Eco- 
nomics"; Fetter, Frank O., "Principles of Economics." 



PART II 
FACTORS AND PROCESSES OF PRODUCTION 

CHAPTER XII 

THE NATURE OF PRODUCTION 

io8. Unity of the Economic Process. — Production 
is the greatest fundamental economic process, although 
in a general way there is unity of all economic processes. 
The genera] divisions of production, exchange, distribu- 
tion, and consumption are merely parts of one great life, 
and are made chiefly for the purpose of analysis and in- 
struction. Actually, there are no distinct and unchange- 
able boundaries between these great divisions. The 
permanence with which they have been held to by eco- 
nomic writers has frequently led young students to wrong 
impressions of the true nature of underlying processes. 
A man may be a producer, an exchanger, a transporter, 
a consumer of goods, while at the same time he is a factor 
in economic distribution. While this unity of economic 
process is evinced on all sides, it is nevertheless true that 
persons specialize along certain lines of work. There 
are those who are manufacturers of goods; others who 
are producers of raw material; still others who devote 
their sole time to the service of transportation; and others, 



ECONOMICS FOR HIGH SCHOOLS 

indeed, who are mere exchangers; while each and every 
one is a representative in the economic process of distri- 
bution. It is convenient to recognize the process of the 
creation of weahh in any form whatever as production, 
and to characterize every other process of economic life 
by some special name, as exchange, distribution, etc. 

109. Character of Production. — Production consists 
in the creation of utilities, or, indeed, in the creation of 
economic goods or wealth. It consists in the transform- 
ing of raw material into forms of utility and beauty for 
the satisfaction of human wants. Primarily, it is the 
application of labor to what is termed nature, to make it 
yield a service to mankind. By nature is meant all those 
physical forces which can be used for the service of 
man and all those climatic and physical conditions which 
modify his environment. First of all we have land, 
which yields through its fertility vegetable foods to support 
the life of man and beast, and mineral products from 
underneath the soil. In this connection, too, we have 
water, which yields the service of sustaining life, enables 
us to transport goods from one place to another, and 
yields a force with which to propel machines. We have 
another form of nature, which is also used as a propelling 
force, primarily, — the muscular strength of animals 
which have been domesticated for man's service. And 
finally, through man's inventive genius, we have the use 
of steam and electricity, two of the greatest forces of nature. 

We have also inorganic substances, the components 
of the earth's crust, which are included in what we call 
raw material. Building stones, clay, limestone, chalk, 
salt, coal, and petroleum, and other sources of wealth, 



THE NATURE OF PRODUCTION 

when once converted into useful products, make up a 
large proportion of the wealth of the community. 

We have also organic substances, which are found 
in the forest already produced by nature in plants and 
vegetables of every variety, which are made available 
by the process of labor. The whole work of production 
consists only of changing the place or the form of material. 
Man has always brought to his aid, through his inventive 
genius, tools and machines to supplement his lack of 
muscular force. Beginning with muscular force, he has 
domesticated the animals and added their service to his 
own limited ability. He has harnessed the winds and 
the water, and thus increased the active forces. He has 
utilized the expansive power of steam and other vapors 
and gases; he has utilized the principles of heat and 
electricity, and thus added to his own great productive 
power. How far he will continue in the increase of his 
power of production yet remains to be seen. Whether 
or not atmosphere, heat, and ether may not yet be added 
to electricity and steam in different forms, and these, 
accompanied with man's inventive genius in the creation 
of machines and tools, add to the power of production 
until again it shall be increased one hundred fold, remains 
to be seen. 

no. Creation of Wealth. — In an economic sense, 
wealth includes all those useful articles which supply 
the wants of man. It matters not whether they may be 
always beneficial in their use or not. If they satisfy 
some known wants, though in the long run their effect 
may be deleterious, the articles assume the form of eco- 
nomic goods, and are called wealth. A discrimination 

123 



ECONOMICS FOR HIGH SCHOOLS 

should be made at once between the common significa- 
tion of the term "wealth," meaning the relative amount of 
property which a man owns, and the economic use of the 
term "wealth." In the latter sense it means any form of 
economic goods or utilities, such as tools, articles of 
apparel, buildings, food, ornaments, or anything which 
satisfies the wants of man. The man who owns the shovel 
with which he labors is wealthy in the economic sense, 
to the amount of the shovel, just as the man who owns 
great machines and buildings and tools and railroads is 
wealthy to that extent. 

The sum total of the wealth of a community is found 
by an estimate of the net private wealth of individuals 
plus the net public wealth of the nation. Sometimes 
those articles which are classified as personal or private 
wealth may be nothing more than an evidence of an 
indebtedness which must be accounted for in the inven- 
tory of the wealth of each and every person. Thus, a 
mortgage may be considered as the private wealth of an 
individual, but in the estimation of the private wealth of 
another individual, upon whose property the mortgage 
is made, it must be considered as an evidence of indebt- 
edness. Thus the person who holds a government bond 
may be considered wealthy to that extent, but in the esti- 
mate of national wealth the same government bond must 
be entered as evidence of indebtedness. 

The creation of wealth has increased rapidly within 
recent years, for its process is necessarily cumulative. 
Each year adds new processes of labor, new kinds of 
machinery, and new methods of development. Each 
year adds a large amount of capital engaged in produc- 

124 



THE NATURE OF PRODUCTION 

tive processes, which adds momentum to wealth producing 
and increases in geometrical ratio the power of wealth. 

III. Who are Producers ? — It is a popular opinion 
that those persons who are transforming raw materials 
into the finished product and those who are engaged in 
the production of agricultural and mineral products 
through the aid of nature are all producers and all others 
non-producers. According to this notion, the capitalist, 
the merchant, the banker, the lawyer, the minister, are 
all classed in the great group of non-producers. The 
Physiocrats estimated the productivity of toil by the 
proportion of useful raw materials secured, as in farming, 
stock raising, mining, lumbering, and so forth, and they 
stigmatized all other occupations as barren because they 
were sustained by the surplus products of the land. Prior 
to them the mercantilists considered all industry as pro- 
ductive only in proportion as it tended to enlarge the 
nation's stock of money. Adam Smith and John Stuart 
Mill called all exertion, however useful it might be, which 
does not take the form of creating some useful material 
object or of fixing and realizing itself in such object, unpro- 
ductive. It has been the tendency of English economists 
to follow Smith and Mill, while the French school of 
philosophers have held to the doctrine that all labor is 
productive that imparts economic modifications to mate- 
rial nature. Some of the German writers go even farther 
than this, and define every form of labor as productive 
which society is willing to pay for; as Roscher states it, 
" Every service which is rationally sought, and duly paid 
for, is productive." 

All members of society who are performing a service 



ECONOMICS FOR HIGH SCHOOLS 

which has exchangeable value, or creating exchangeable 
goods, may be called producers. It is a popular error 
these days to suppose that farmers, for instance, are more 
a producing class than merchants, bankers, manufac- 
turers, or transporters of goods. The farmer, it is true, 
produces food for the merchant, but the merchant ex- 
changes clothes for the goods. If it were not for the 
merchant, the farmer would be obliged to leave his work 
and obtain his clothing from the clothier personally. Or, 
if it were not for the manufacturer, he would be obliged 
to do as he did in the olden time, — allow his wife to manu- 
facture it for him. Also, the farmer would manufacture 
his own tools, and it would occupy much time which could 
be used more advantageously in the tilling of the soil. It 
is simply a question of the division of labor, in which the 
farmer says, " I will raise the wheat and exchange it for 
clothing, implements, furniture, flour, and for all the 
food that I need, which does not grow upon my land." 
Possibly the farmer has it within his power, if he chooses, 
to become independent to a greater extent than any other 
individual, for in a limited way he has within his grasp 
the source of all production. Nevertheless, without 
turning civilization back upon itself, he must remain 
dependent upon others, who cooperate with him in the 
process of production. 

112. Nature of Wealth. — Wealth consists of the 
utilities in the form of economic goods ^vhich are formed 
by shaping, combining, or placing the various elements 
of nature. This wealth has sometimes been classified 
as material and immaterial. According to this classi- 
fication, material wealth includes tangible goods that 

126 



THE NATURE OF PRODUCTION 

may be exchanged in the market; immaterial wealth 
refers to forces and conditions, such as superior skill, 
talent, or endowment, good will in business, and certain 
forms of credit. It appears that it is better to discrimi- 
nate very carefully between wealth and the individual; 
that is, between wealth and the conditions of wealth. If 
wealth consists in the well-being of man in his relation 
to material goods, it is necessary in political economy 
to understand that wealth is " objective to the user, 
material, useful, and exchangeable." These are the four 
essential characteristics of wealth. Wealth, too, is mate- 
rial, because those things which are immaterial cannot 
be well measured, and wealth can be. Only those things 
which are said to be useful and exchangeable can be said 
to be wealth, and by useful we mean things that are used, 
not necessarily things that are beneficial. It is some- 
times said that people sell the good will of a business, 
and therefore that the good will of a business should be 
considered material wealth. A careful analysis shows 
that you sell a business at a higher premium on account 
of its locality, and the excessive bonus paid is really in 
the nature of rent paid for a permanent monopoly. It 
is also asserted that when Patti gives one of her mag- 
nificent renditions, her song is exchangeable wealth. It 
would be better to regard Patti as an individual endowed 
by nature and developed by training to such an extent 
that she yields a superior service to mankind, which is 
regularly sought and duly paid for as a service, and not 
as wealth. The extra sum paid for this superior service 
is in the nature of rent of native and acquired talent and 
qualities. 

127 



ECONOMICS FOR HIGH SCHOOLS 

113. Various Methods of creating Wealth. — Mate- 
rial wealth is generally produced (i) by spontaneous 
products of nature, such as forests, mineral springs, and 
favorable localities; (2) by digging products from the 
mines; (3) by the growth of vegetable and animal prod- 
ucts obtained by working in harmony with nature's forces ; 
(4) by transporting things from place to place; (5) by 
changing the forms of things; and finally, (6) by exchang- 
ing them between different owners. Outside of these 
specific processes of obtaining material wealth, social 
organization and social improvement are conditions 
which enhance all of these necessary forms of wealth 
making. 

It is evident that the process of coloring by dyestuffs, 
or that of soap making, may be good illustrations of the 
chemical production of wealth. Everything pertaining 
to the making of clothes is an illustration of the mechanical 
processes of production. It is not difficult to see why the 
transportation of goods from place to place increases the 
value of wealth. As an example of this, the wheat and 
corn on the farm is of less value than after it is placed 
near the consumer, thousands of miles away. There is 
then no difficulty in understanding how it is that the 
exchange of goods increases wealth. Suppose a collector 
owns a good farm horse and a farmer a good carriage 
horse. The farm horse, not being a good roadster, is 
of. little value to the collector, while the carriage horse is 
of little service at the plow and of little value to the farmer 
in any other way. By an even exchange of horses, each 
would be benefited by the operation. This disproves 
the old theory that if two men trade horses, one at least 

128 



THE NATURE OF PRODUCTION 

must be beaten by the operation. This principle has 
been further illustrated by the example of three persons, 
each tied to a stake, without communication: one having 
clothing and no food or fire, another having only food 
without clothing or fire, and the third having fire without 
clothing or food. As it is, each one will perish for the 
lack of the surplus goods which the others have. Could 
they get together and exchange their surplus prod- 
ucts, all might live. This principle is vital in settling 
the questions of international exchange, trade, and 
tariffs. 

114. Different Ways of creating Value. — The amount 
of wealth an article contains is termed its value, which 
represents the power an article has to exchange for other 
articles. There are various ways of creating this value, 
although it arises largely from the desirability of an article, 
and can always be traced to its subjective condition. 
The value of an article may be enhanced frequently on 
account of time. Thus, to keep apples from the autumn 
into the winter will increase their value, just as keeping 
ice from winter to summer will enhance its value. Also, 
the transporting of commodities from one place to an- 
other will increase their value. Thus, corn which is of 
little value in Kansas may be of greater value in Chicago, 
still greater in New York, and greater in England, simply 
because of transportation. But the greatest method of 
developing value is by changing the form of articles. The 
timber of the forest may be of little value until trans- 
formed into wagons or furniture, when its value may be 
increased one hundred fold. Cotton in its raw state has 
a certain value, but when changed into a fine garment 
K 129 



ECONOMICS FOR HIGH SCHOOLS 

through various processes, its value is greatly enhanced. 
The best illustrations of the various kinds of value may 
be seen in the transformation of iron ore into various 
articles. Thus, the ore at the mouth of the mine is pos- 
sessed of a certain value, but when it is transported to the 
smelter, its value increases because of the change of place. 
When passed through the smelter, it is changed into pig 
iron, and its value is greater than before. If the pig 
iron is transported to steel works, its value is increased 
again, and increased still again when transformed into 
steel. If the same steel is developed into a sewing 
machine, a bicycle, or a watch spring, its value is enhanced 
very many times. The value of manufactured articles 
may be greatly increased by storage until the demand 
for them is increased. 

We shall find, then, that in the production of wealth, 
to change the form or place of an article may increase 
its value, and that the value is represented always in the 
power of exchange. It is the relative term always accom- 
panying the utility of an article which represents its want- 
satisfying power. But this takes us back again to the 
proposition that all persons engaged in these various 
processes are producers, and all those who are aiding 
directly or indirectly the persons engaged in these specific j 
processes may also be classified as producers. 

115. Various Processes of Production. — If we in- 
quire, however, into the essential elements of production, 
and try to estimate what factors are most largely engaged 
in the process, we shall find that land, or nature, labor, 
capital, and social organization are the great factors of 
production. Not that nature in itself is a producer of] 

130 



THE NATURE OF PRODUCTION 

wealth without the process of labor or human exertion, 
but it occupies such an essential position in the process 
of production that it is considered a factor. These are 
all working in combination in the creation of wealth. 
While capital at first was not a primary factor, it has 
become essential to modern economic processes. 

1 1 6. Essential Factors of Production. — The two essen- 
tial factors of production are land (or nature) and labor. 
Without these there can be no artificial production of 
wealth. By the land we mean not only the earth in 
its fertility and wealth of vegetable and animal life, but 
the water power, and indeed all the permanent forces 
of nature which may be used and turned to man's service. 
It is only by the application of labor to these that wealth 
or economic goods are produced. In the beginning, labor 
takes the initiative by transforming the products of nature 
into useful articles, such as bows and arrows and imple- 
ments, or into boats, canoes, and household utensils. 
Again, it creates clothing and houses, — all from the 
raw products of nature. These productions are called 
wealth, in the creation of which labor has been the con- 
stant factor from the beginning. 

117. Conditions of Wealth Producing. — If man 
through labor has developed certain wealth, and this 
again is turned to aid in the production of other wealth 
or economic goods, such wealth, set apart to be used in 
the production of economic goods, is called capital. In 
the modern economic life there is no production of any 
great extent possible without capital. Though labor 
logically preceded capital in production, in modern eco- 
nomic society capital usually takes the initiative in pro- 

131 



ECONOMICS FOR HIGH SCHOOLS 

Ruction. The process is as follows: first, labor produced 
certain portions of wealth; then this wealth was used 
along with labor to create other wealth. As wealth in- 
creased, capital became more prominent, and it employed 
more laborers in the obtaining of raw material. In some 
enterprises we find a large amount of capital and a small 
amount of labor necessary for production, while in others 
the process is the reverse, and we find a large amount 
of labor working with a small amount of capital. But in 
every instance, before production is entered upon, capital 
takes the initiative. It constructs the buildings, it fur- 
nishes the machinery and raw material, and gives labor 
an opportunity to earn its own wages. Thus labor is 
limited in its efforts by the amount of capital in use. 
The other non-essential condition of wealth producing is 
social organization. It is sometimes said that the state 
is a partner with the individual in the process of produc- 
tion. This is rather a strong and fanciful expression, 
although it must be conceded that without social organi- 
zation modern business enterprises would be futile. The 
organization of society protects property and guarantees 
the rights of each individual to the products of wealth. 
More than this, when society at large deepens a harbor 
or widens a river, builds a canal or railroad, or furnishes 
means for the better development of agriculture, manu- 
factures, exchange, trade, or commerce in any way, it 
is performing a great service in the advancement of pro- 
duction. Therefore modern productive enterprises are 
not possible without social organization, and the effect 
of social organization is to advance them at a rapid 
rate. 

132 



THE NATURE OF PRODUCTION 

ii8. Means of increasing Production. — One of the 

best methods of increasing production is through superior 
business management, and this has developed a distinct 
class of people, and indeed a distinct vocation, in pro- 
duction. It might be well to suggest the ordinary fifth 
factor in production as managing ability, for indeed, with- 
out this, modern business enterprises could not be car- 
ried on. The entrepreneur or business manager furnishes 
the brain power that keeps industry intact. He assumes 
the risk and responsibility of business, undertakes busi- 
ness enterprises, paying for capital, labor, and land as 
he has need. But while he has the responsibility of loss, 
he has the right of gain. Outside of a sound and indus- 
trious body of laborers, other things being equal, no 
other factor is of greater importance than the managing 
ability of the business men who undertake the great 
enterprises of industrial life. 

There are other means of enhancing production, by hav- 
ing a better quality of labor and better relations between 
those furnishing the capital, the labor, or land, and the 
managing ability. Harmonious activity of all factors en- 
hances production. Also, it may be stated that certain 
things which have arisen out of the necessity of economic 
progress from time to time represent some of the most 
wholesome conditions of production. Among these are 
the division of labor which enables men to produce more 
in the same time with less energy; the introduction of so- 
called labor-saving machinery, which combines with man's 
service as the result of his inventive genius ; and the credit 
system, which enables the rapid exchange of goods ; rapid 
transportation facilities; the fertile soil and excellent cli- 

133 



ECONOMICS FOR HIGH SCHOOLS 

matic influences, — all of which tend to modify and inten- 
sify the processes of production. 

References. — Walker, Francis A., "Political Economy"; 
Gunton, George, "Wealth and Progress"; Roscher, William, 
"Political Economy"; Marshall, Alfred, "Economics of Industry." 



134 



CHAPTER XIII 

LAND AS A BASIS OF PRODUCTION 

1 19. Land, or Nature, the First Consideration. — Man 

derives directly or indirectly all his sustenance from the soil 
and from the elements of nature. From the soil he receives 
vegetable and animal products, and from the water he 
receives power to turn machinery and means of transporta- 
tion. The winds furnish him means of propelling machin- 
ery and mills, and carrying on commerce. The forests 
yield him timber; the mines yield him coal, salt, iron, pre- 
cious metals, and many other products. The sunshine 
pours a flood of light and a volume of heat upon the earth, 
and quickens everything with life. It is from nature that 
man receives the conditions that allow life and the means 
which perpetuate it. It is through labor, in the mastery 
of these forms, forces, and elements of nature, that man 
supports life and advances his material welfare. 

120. Bountifulness of Nature. — Nature is everywhere 
bountiful so long as labor forces her to yield her treasures. 
Economic writers have spoken of the niggardliness of na- 
ture, and how through excessive toil only could man receive 
his support. They have pictured all of the difficulties of 
economic life as appearing directly on account of nature's 
method of holding her bounties from man. Other writers 
have tried to show that nature is bountiful, and that all 
wealth is lavished with a free hand. 

^35 



ECONOMICS FOR HIGH SCHOOLS 

The bountifulness of nature varies in many ways on 
account of different climate and soil. In one territory the 
soil is fertile, and with a small amount of cultivation re- 
sponds readily to the labor of man; in another place the 
soil is poor, and with his utmost attention it yields but a 
meager crop. In the tropical climates, food grows already 
prepared, while in the colder climates the soil must be 
thoroughly tilled to yield a crop. Within the tropics very 
little clothing or shelter is needed for protection, in the 
temperate climate substantial houses and abundant cloth- 
ing are necessary, while in the regions of extreme cold, 
man's whole time is occupied in obtaining sufiScient animal 
food to keep him alive, and clothing to preserve him from 
the rigors of the climate. Standing alone, nature appears 
hard, cruel, and niggardly, but with labor applied she is 
made to yield a rich store of treasure. By labor, food is 
accumulated in abundance, clothing comes without stint, 
and houses and palaces arise for the protection of man. 
By labor, the refinements of art and education are made 
possible. It is true that at times nature appears fickle, 
for drought may spoil the crops, storms may devastate them, 
buildings may be destroyed by the ravages of fire and wind, 
and men may perish through starvation or the fatal pesti- 
lence. Yet it may be stated that, upon the whole, nature 
yields her bounties to man in proportion to well-directed 
labor. 

121. Offices of Land. — Land is essential, directly or 
indirectly, to all economic processes. Primarily, it is the 
great factor in production. It gives us standing room, 
without which nothing can be accomplished; for location, 
or position, is essential to life. In a scientific way the prin- 

136 



LAND AS A BASIS OF PRODUCTION 

ciple of location has a vast deal to do with economic life 
and economic theory. Again, by fertility it yields vegetable 
products for man and beast for the purpose of sustaining 
life and for use in the arts and industries, and finally from 
underneath the surface it yields the rich mineral products, 
— salt, iron, tin, copper, and zinc, — so much used in the eco- 
nomic arts, and gold and silver, desired for their services 
as money and in the ornamental arts. With these three 
uses of land man spends the greater part of his life in mak- 
ing a combination of forces or materials in the creation of 
forms of wealth, 

122. Civilization and the Land Question. — In the 
economy of human existence the influence of a fertile soil 
cannot be overestimated. The ancient civilization of 
Babylon, the arts and industries of Egypt, the philosophy 
and learning of Greece, depended upon a fertile soil. So 
great has been the influence of the land question among the 
nations of the world that if one were to write the history 
of land tenure he would have formed, in general, a correct 
estimate of the primary cause of the rise and development 
of national life. In the United States the effect of a large, 
fertile agricultural area is frequently overlooked by eco- 
nomic philosophers. Its broad valleys and fertile soil 
brought immigrants from the Old World to seek homes in 
the new land ; its abundant mineral resources found in the 
heart of the mountains brought miners from the Old World 
to dig and delve for treasures here and develop a great pop- 
ulation. It is the immense yield of these agricultural and 
mineral products that supplies the millions who run the 
factories, the looms, and the shops of the home country, 
and furnishes the surplus to feed the nations of the Old 

137 



ECONOMICS FOR HIGH SCHOOLS 

World, for which we receive an ample return in a variety 
of imported products. 

123. Population and Land. — With the growth of popu- 
lation, the supply of labor is constantly increased, and it 
is limited by the amount of available food supply or sub- 
sistence. Fearing that the growth of population might 
gradually outrun the means of subsistence, an English 
economist named Malthus advanced a theory of population 
as follows: he held that population tended to increase 
in a geometrical progression, while the food supply under 
most favorable circumstances could not be made to increase 
more rapidly than in arithmetical progression. Hence, if 
there was no check to the natural increase of population, 
there would soon be more people than the land could sup- 
port, and thousands would die of starvation. But there 
are sufficient checks in the growth of population to allay, 
all fears on the subject. The first group are called the 
positive checks, by which population is kept down by means 
of accident, war, pestilence, plagues, intemperance, vice, 
and crime. Thousands thus perish from the face of the 
earth every year. The preventive checks are those ofj 
character and prudence, by means of which, as population! 
becomes denser, marriages are postponed and the number of 1 
births lessened. Also, through self-control, families become j 
smaller each succeeding year, and a check occurs to in- 
creasing density of population. The result is, that popu-j 
lation practically does not increase in a geometrical ratio. 
Again, through modern invention and skill, land is made to j 
yield a larger return for the support of life. Thus, by in- 
tensive agriculture, an acre of land will yield a larger sup- i 
port of life than ever before. For example, an acre of 

138 



LAND AS A BASIS OF PRODUCTION 

land in England yields a larger crop than it did a hundred 
years ago. By the modern art of cooking and preparing 
food, a given quantity of food has nearly doubled its power 
to support life. So that there has always been land 
enough, and, so far as we can see, for hundreds of years to 
come there will be sufficient land to support the population. 
Some of the instances of the rapid increase of population 
would seem, however, to be subject for thoughtfulness, at 
least. If population should increase in the United States 
in the future as it has done in the past, it is only a matter 
of time when there will not be sufficient standing room for 
the people. If our population continues to double every 
twenty-five years as it has done in the past, in 1925 we shall 
have 150,000,000 people; in 1950, 300,000,000 people; 
in the year 2000 we should have 1,020,000,000 people; 
and it would not be long before we should have in the 
United States more than the entire population of the globe 
at the present time. But the checks have already set in, 
both as to immigration and to birth, and such a calamity 
is not likely to occur. Mr. Marshall points out that if 
there are only two people on the face of the earth, and that 
if population doubles once in fifty years, at the expiration 
of 3000 years the whole surface of the earth, land and sea, 
would be covered with people 300 deep. The significance 
of these subjects is seen when the relation of land to popu- 
lation is considered, for the development of wealth is 
changed to a great extent by a rapid increase. 

1 24. Laws of Income from Agriculture. — Industries are 
divided for convenience into those of increasing returns, 
decreasing returns, and equal returns. By this is meant, 
in the first instance, that if a certain amount of labor and 

139 



ECONOMICS FOR HIGH SCHOOLS 

capital yields a certain income, double the amount of capi- 
tal will yield more than double the income; and in the 
second case, that if a certain amount of labor and capital 
yields a certain income, double the amount of capital and 
labor will yield less than double the income. In the third 
case, it is assumed that income will be increased in propor- 
tion to the amount of increase of labor and capital. 
Agriculture is generally considered an industry of decreas- 
ing returns. But it is necessary to consider specifically 
what is meant by this assertion. Usually, when this state- 
ment is made, it is understood to apply to a limited portion 
of land. Thus, if a farm of a thousand acres is considered, 
a certain number of laborers with sufficient capital applied 
to work the farm will give a certain income. If double the 
number of laborers crowd into this same area, with a pro- 
portional increase of capital, and the limit of production 
is not reached, they may greatly increase the product. 
Hence, increased amounts of labor and capital may be 
continually applied to this tract of land with a gradual 
increase in the returns or product; but this will be entirely^ 
disproportionate to the labor and capital expended. If 
may be more clearly illustrated in this way : to plow the 
land once will cause it to yield a certain crop ; to plow it a J 
second time will certainly increase the crop, but will notj 
double the product ; to plow it a third time will probably 
increase the product slightly, so that there is not propor- 
tionate return to the amount of capital and labor invested. 
Yet, when we consider agriculture as a whole, it will be 
found, if a long period be considered, that it is an industry 
of increasing returns. The invention of new machinery, 
new methods and appliances, and the increased utility of j 

140 



LAND AS A BASIS OF PRODUCTION 

food, as above staled, yield a larger return in proportion 
to the number of persons engaged each succeeding year. 
In the consideration of this principle, all accidents of 
drought and years of agricultural depression must be 
excluded as abnormal. 

In the case of manufactures, however, which are gen- 
erally classified as industries of proportionate returns, it 
will be found that they increase their returns from year 
to year, in proportion to the number of persons engaged, 
more rapidly than does agriculture. However, if taken 
in a limited sense in a particular field, owing to competi- 
tion, it will be found that manufactures decrease in returns 
the same as agriculture in a limited field. Where special 
monopolies exist, such as railroads, telegraph lines, and 
water power, the industries are usually those of increasing 
returns, as they yield an income in a proportion greater 
than the increased application of capital and labor. 

125. Industries of Limited Returns. — In agriculture, 
when a given territory is considered, the law should be 
given as one of limited returns. That is, in the cultivation 
of a given tract of land a point is soon reached at which no 
additional application of labor or capital will cause the soil 
to yield any increased product. In many of the industries 
outside of agriculture the same principle of limited returns 
is to be observed in a lesser degree. The law of competi- 
tion, which tends to reduce the market price to the cost of 
production, indicates the limitations of incomes. 

126. Extension of Territory. — The opening up of new 
lands to modern civilization presents the relation of land 
to income in its clearest light. When Columbus first 
landed in America, a few thousand Indians were roaming 

141 



ECONOMICS FOR HIGH SCHOOLS 

over a vast territory. They felt that there was not suffi- 
cient room for them to obtain a Hving, so they fought with 
each other for territory. To-day ninety million people 
occupy the same territory within the present boundary of 
the United States, and still, with the exception of a few 
congested districts, there is abundance of room. When the 
barbarians swept down over Europe and invaded the Ro- 
man empire, it was for the purpose of finding a larger area 
of land. Although few in number, their mode of living 
made the country insufficient for their needs, and made 
them discontented with their lot. Thus, rather than seek 
different methods of intensive agriculture or larger use of 
the land, they simply sought new lands, hoping to retain 
their old mode of life. Had they changed their civiliza- 
tion by introducing intensive agriculture, the utility of 
land would have been so greatly increased as to have sup- 
ported a larger population without the necessity of migra- 
tion. 

127. Land Area. — Within recent years large amounts 
of fertile lands have been brought into use in the United 
States, which have yielded a large increase in the returns 
of the quantity of the products. As the demand for every 
agricultural product shows a diminishing scale of utility,! 
and as the value of the whole product is determined by the 
marginal utility represented by the last unsatisfied want, it 
appears that if the scale of demand remains constant, there 
will be a diminished value of the total product; and this 
means that a point will be inevitably reached where receipts 
will fall below costs, even though costs themselves are also 
diminishing. We have had ample illustration of this fromj 
Western farming in the years from 1889-1896. For thai 

142 



LAND AS A BASIS OF PRODUCTION 

cost of agriculture has been decreasing all the time, while 
the value of the product has decreased more rapidly than 
the cost; hence the price of a commodity in the market 
has frequently been reduced below the cost of production. 
Thus a relatively decreasing number of agriculturists have 
provided food for themselves, for the whole nation at large, 
as well as for foreign markets. If we refer to quantity, 
it appears that agriculture, taken as a whole, considered in 
the light of modern industrial methods, through a period 
of a century, is yielding more to-day in proportion to the 
capital expended upon it than ever before. It is estimated 
that in England during the last six hundred years the prod- 
uct per acre of staple crops has increased tenfold. But 
this, strictly speaking, must refer to the quantity of the 
product rather than to its value. 

128. Transportation and Agriculture. — One of the 
greatest effects to be considered in relation to the produc- 
tivity of the soil is that of transportation. Cheap transpor- 
tation has a tendency to enlarge the agricultural areas and 
bring distant fertile lands into the market. For this reason 
the people have abandoned the farms of the East and have 
taken up lands in the fertile valleys of the West, distant 
from markets ; yet the fertility of the soil is so great that 
the yield is sufficient to pay the transportation to market 
and leave an income greater than that of the inferior lands 
of the East, situated close to the markets. Indeed, the 
influence of the fertile lands of the Mississippi Valley has 
caused the abandonment not only of the poorer lands of 
New England, but even those of Scotland and England 
and other regions of the Old World, which have been for- 
saken for the fertile lands of the New World. Everywhere 

143 



ECONOMICS FOR HIGH SCHOOLS 

we shall observe the shifting of the population, rushing 
toward new and fertile lands, or receding as they are 
deceived by the process. This change has a vast deal to 
do with the doctrine of rent. Since 1897 agricultural 
products in the United States have been large and prices 
have gradually increased. The increased prices have been 
caused in part by excessive demands for food stuffs and in 
part by general increase of the amount of money in cir- 
culation, — in other words, an inflation of values. 

129. Policy of the United States. — Nations have had 
different policies for the disposal of agricultural lands. 
The United States, by its laws of 1787, adopted a policy 
which had hitherto been unknown in the practices of na- 
tions in dealing with their public domain. This policy 
made it possible, for every one who desired, to obtain a hun- 
dred and sixty acres of land at a minimum price. This 
was deemed the wisest and best disposition of the land; 
although it did not always work well in practice, for the 
intention of the law has frequently been thwarted by indi- 
viduals, who, by fair means or foul, have grasped large 
tracts of land, increasing their holdings in some instances] 
to territories equal to principalities. The methods of dis- 
posal of land to settlers shifted from time to time with the • 
desire to make it easy for them to take up land. How- 1 
ever, in this connection, it may be stated that from 1870 
to 1880 the average size of farms gradually diminished,, 
and from 1880 to 1890 there was only a slight increase in] 
the average. The average size of farms has continued to 
diminish to the present time, 1907. On the one hand, j 
large farms were being divided into smaller tracts; and] 
on the other, small holdings were absorbed by the larger, j 

144 



LAND AS A BASIS OF PRODUCTION 

Thus, while a large number of vast holdings have been 
created, outside of these the average size of the farm is 
diminishing. As to the advantages of large or small 
holdings, Mr. Walker asserts that variety of farms is best 
for the benefit of agriculture. He holds that it is a good 
plan to have some great farms upon which the most im- 
proved machinery shall be used and the most modern 
scientific processes of agriculture practiced, in order to 
furnish a stimulus to improved methods. He further 
asserts that the medium-sized holdings, which give char- 
acter to our great farming communities and enable men of 
moderate means to engage in the agricultural business, are 
beneficial to a great republic in which the people are en- 
dowed with the right of self-government. He further dem- 
onstrates that small holdings should be available, so that 
those who desire to quit the ranks of the wage-earning 
class may own a small parcel of land, and thus have their 
own homes and carry on their own business independently. 
This variety of landholding corresponds to the variety of 
life which is necessary to the stability and prosperity of a 
government by the people, 

130. Monopoly in Land. — Many fear that the absorp- 
tion of small holdings into great baronial estates will con- 
tinue until a monopoly of land shall obtain, and landlord- 
ism shall prevail in the United States as in the Old World. 
In England and Scotland the land to-day is owned by a 
very few people, owing, in part, to the laws of primogeni- 
ture and entail. France, on the contrary, through the 
influence of an ancient law, insists that the estates must be 
divided among the heirs, and the practice of very small 
holdings has obtained there. According to the census of 
L 145 



ECONOMICS FOR HIGH SCHOOLS 

1890, 65 per cent of all the farms in the United States were 
owned by the occupants. Tenant farming has increased 
since 1890. This would show that landlordism, or the 
rental system, is gradually increasing in the United States. 
However, the farms are still small and the tendency to sub- 
division is great. What the future will bring forth is diffi- 
cult to see. Repeated periods of agricultural depression 
may lead to the union of agricultural interests and the 
management of farming on a large scale, after the plan of 
a great department store or a modern " trust." When a 
person obtains a tract of land which is peculiarly desirable, 
to a certain extent he obtains a monopoly over that par- 
ticular piece of property. But so long as there are other 
tracts more or less desirable, this monopoly can never be 
perfect ; and so long as he must compete in the market for 
the sale of agricultural products, it is impossible for him to 
fix a moiiopoly price on his goods. The general tendency 
at present is to subdivide large estates. Considered as a 
whole, then, land is hot a monopoly, unless it can all be 
owned and managed by a given individual or combination 
of individuals. Nevertheless, owing to the fact of the 
difference in fertility of soil and desirability of location, 
a monopoly of land arises in the form of rent, independent, 
to a certain extent, of the fact that the individual producer 
cannot fix a monopoly price and therefore obtain monopoly 
profits from his agricultural produce. 

131. Agricultural Area in the United States. — Not- 
withstanding the fact that the city population has increased 
to an enormous extent, the agricultural area in the United 
States has increased more rapidly in proportion. In 1790 
there was about 3 per cent of the total population in cities; in 

146 



LAND AS A BASIS OF PRODUCTION 

1900 there was about 33.1 per cent. The agricultural area 
has increased rapidly on account of the opening up of 
extensive lands. In 1900 the acreage of farm lands in the 
United States was 814,201,546, of which 414,713,191 acres 
were improved, and 426,541,833 were unimproved. The 
total value of farm property in 1900 was $20,541,001,838. 
Besides the farm lands there were about 400,000,000 
acres desert and government land, 70,000,000 acres coal 
lands, 80,000,000 acres timber land, and probably about 
100,000,000 square miles unsettled. 

132. Variety of Agricultural Products. — The United 
States has a wide variety of products, on account of its 
temperate and semitropical territory. In this wide ex- 
tent, from the cereals of the North to the tropical prod- 
ucts of the South, we find a great variety of fruits and 
grains. 

As demand for variety of foods has increased, there has 
been a marked tendency to develop diversity in agricul- 
ture. Instead of sections devoting themselves entirely to 
wheat, to corn, or to fruits, there is a tendency to raise all 
of these to meet the irregular demands for products. Nev- 
ertheless, corn predominates in such states as Nebraska, 
Kansas, Iowa, and Illinois, while wheat predominates in 
Minnesota, Ohio, and the Dakotas. In many sections of 
California, where formerly wheat was almost the only crop, 
now fruit predominates, with a variety of other produc- 
tions. The farmer is slowly learning that, because of the 
uncertainty of climate and the variation in demand on 
account of the irregular foreign production, he should vary 
his crops, so far as the soil and climate will permit, to insure 
a successful return on part of the land, if not on all. This 

147 



ECONOMICS FOR HIGH SCHOOLS 

has the additional advantage of utiHzing the varieties of soil 
that exist even on the same farm, while the alternation of 
crops on the same soil is necessary in many instances to pre- 
serve the land from exhaustion. In considering economic 
conditions, scientific agriculture has done much to increase 
the productive yield of land. 

Stock raising has continued in general throughout the 
United States. While an enormous stock production is 
still found on the grazing lands of the West, a still larger 
value of stock production is found on the smaller farms and 
special stock farms. When each farmer has a few pigs, 
sheep, cattle, horses, and considerable poultry, for the 
market, the returns from these sources in the aggregate 
are large. Stock raising has become one of the most pro- 
ductive and certain occupations of the farm. 

133. Economic Effect of Machinery. — The process 
of farming has been almost entirely transformed by the 
introduction of devices and machines for the cultivation of 
the soil. The small farms of the Atlantic seaboard were 
rough, and in the early period full of stones, sticks, and 
stumps of trees. It was necessary to conduct farming 
by hand, or with small tools or machines, but the opening 
of the wide expanse of prairie land of the Mississippi Valley 
enabled farmers to introduce machinery for plowing, sow- 
ing, and harvesting, that are marvels to one not accustomed 
to their use. The economic effect is to lessen the cost of 
production. That is, one man can now accomplish as 
much with machinery as twenty men could formerly with- 
out. The whole population of the United States, with the 
old-fashioned machinery, could not produce what is now 
produced by a third of the population with modern ma- 



LAND AS A BASIS OF PRODUCTION 

chinery. One economic effect of this introduction of 
machinery is that a smaller population is being used in the 
production of raw material in proportion to that employed 
in making the finished product. Hence a proportionately 
smaller return to the aggregate of farm labor than to 
that of manufacturing labor. 

While the decrease in the cost of production is evident, 
an enormous loss has been suffered on account of the rapid 
changes of machinery. As in manufacturing, the farmer 
who succeeds must keep up with the latest improvements, 
or the cost of production will be greater than the price of 
his product in the market. Therefore the whole farming 
country is strewn with out-of-date machinery, which must 
of necessity be a great economic loss. 

Again, the lack of economy of consumption has also 
created a great loss. The old-fashioned farmer might 
lose a spade, or a hoe, or a plow, by carelessness and ex- 
posure to the weather, and the loss would not be consid- 
erable. But sun and storm and wind will destroy the 
modern complicated farm machinery, which represents 
an outlay of hundreds of dollars, more readily than it 
would destroy the old-fashioned instruments. Therefore, 
to the farmer it is of prime importance that he economize 
the use of his machinery, if he wishes a margin in farming. 

We may almost say that the agriculturist is a manufac- 
turer of products, the same as any other manufacturer. 
It is true, he has the land upon which to labor, and so does 
every other producer, to a certain extent. He receives his 
assistance from nature in the fertility of the soil, though the 
miller may receive his from the water power, and the manu- 
facturer from mere occupation of the land. Hence, success- 

149 



ECONOMICS FOR HIGH SCHOOLS 

ful farming lies more and more in understanding the nature 
and preservation of soils and the adaptability of crops to 
them, a study of the best machinery, its care and use, and 
a careful study of the markets, to know what to produce 
and when to market it at a given price. 

134. Corporate Farming, — Scientific methods have 
been used on very many large farms, and while small 
farming has usually been more profitable, because more 
largely introduced, it still remains true that a large farm, 
properly managed, can produce more cheaply than a series 
of small farms. For each of the small farms must have its 
own set of machinery, its buildings, its special manage- 
ment, etc. Here, as elsewhere in all industry, combina- 
tion, if there is sufficient brain power exercised in organiza- 
tion, will enable a cheaper production. Just as the depart- 
ment store may sell goods at a lower rate, and make a profit, 
than smaller stores in competition, or as a trust or combine 
may furnish manufactured articles more cheaply than a 
number of factories in competition, so a large farm under 
corporate management, where the territory would permit, 
might yield a larger return. But usually it does not, be- 
cause of the lack of care in tilling every foot of the soil well 
and making it yield its utmost ; while, on the other hand, 
such care is frequently bestowed upon the small farms. 

The chief question in all of these industries is economy 
of consumption; or, in plain language, the lessening of 
expenses of handling the larger amount of the same grade 
of goods, enabling the employment of large machinery, 
which lessens the cost of production, and the advantage 
of transportation. On the other hand, intensive agriculture 
lessens the relative cost of tillage because of smaller acreage. 

ISO 



LAND AS A BASIS OF PRODUCTION 

One of the best forms of intensive agriculture in modern 
or ancient times is that of irrigation. In the valleys of the 
Euphrates and the Nile, in India and Spain, this method 
furnished in ancient times a food supply for many millions 
beyond the valleys in which the crops were raised; and 
especially in modern times in the western part of the United 
States, in the so-called arid region, irrigation has been 
carried on with great success. Irrigation contributes to 
the density of population, and therefore develops a better 
system of industrial cooperation, which yields a higher 
return of economic product for the labor employed. 

Irrigation will not only allow the use of lands that could 
not otherwise be called into service, but by proper use of 
lands of sufficient rainfall they may be made to yield a 
larger return for the labor and capital expended. It has 
been demonstrated that agriculture is an industry of dimin- 
ishing returns. The whole trouble with it as an industry 
is, there is a limit to the amount which an acre will yield. 
You may double the capital and double the labor, but it is 
quite unusual to double the return. Therefore, the im- 
portance of irrigation is to increase this yield beyond the 
ordinary return, with comparatively little labor. Thus it 
is that farm lands are made to yield a larger return each 
succeeding year, although it may be a larger return in 
quantity and not in exchange value. It is this intensive 
agriculture which prevents in a measure the population 
from overtaking the food supply. Malthus demonstrated 
that unless there were positive and preventive checks on the 
population, which increases in a geometrical ratio, it would 
in time outrun the food supply, which increases in an 
arithmetical ratio. Intensive agriculture enables one 



ECONOMICS FOR HIGH SCHOOLS 

acre to yield a much larger food supply than it otherwise 
would. It is in line with scientific fertilization, which 
forces nature to yield her bounties more freely. A cheap 
food supply is beneficial to the human race and to all 
forms of progress. By a cheap food supply is meant the 
largest possible return of the land for the least possible 
effort, so that, though the farmer may receive lower prices 
for his food, he is ultimately benefited by being able to 
purchase manufactured articles at a lower price, for cheaper 
goods make cheaper manufactured articles. 

One of the important effects of a cheap food supply in 
the Old World was dense population. Owing to the cheap- 
ness of food, the population multiplied rapidly, and in the 
imperfect form of government this cheap food developed 
despotism. A few individuals could, under these circum- 
stances, rule the masses. But under enlightened govern- 
ment there need be no fear of a race of serfs. All densely 
populated districts are in danger of the oppression of bad 
government, although the possibility is for the best govern- 
ment. In a country where the people are jealous of their 
liberties there can be no danger of the development of des- 
potism on account of thickly populated communities. In- 
deed, the permanency of agriculture tends to develop per- 
manent social and political relations. And one of the chief 
economic as well as social blessings is that the yield shall 
be permanent. A farmer practicing irrigation knows 
about what his income will be each year. That is, he rises 
above the uncertainty of drought and the fickleness of 
climate in general. 

135. What will be the Effect of Irrigation on Prices? — 
In general, prices are regulated according to the law of sup- 

153 



LAND AS A BASIS OF PRODUCTION 

ply and demand, or, more specifically, by the marginal 
cost of productivity; and if a large amount of agricultural 
produce is thrown upon the market, it will have a tendency 
to lower prices, until, through the development of other 
industries, it shall be absorbed. But a small amount of 
irrigable land in the United States could scarcely be the 
controlling element in the establishment of prices. The 
products of the irrigable lands would receive the same 
price, regardless of the cost of production, as those of other 
lands, where the cost of production is greater. The result 
would be that larger profits would come to the irrigated 
land, or else prices would fall. Should irrigation be carried 
on to such an extent that the farm produce should be in- 
creased sufficiently to cause a fall in prices, the poorer classes 
of farms would go out of use, while still the irrigated lands 
would continue to be cultivated at a profit. Whichever 
result might occur, the irrigated lands would profit at the 
expense of other territory, less favorably situated. How- 
ever, as the immediate territory in which irrigation is car- 
ried on may absorb all the products, an irrigated district 
may not compete with districts of normal rainfall. 

A high state of industrial organization can only occur in 
relatively dense population, and the rapid accumulation 
of wealth is dependent upon a highly organized community. 
The separation of producers into natural classes, and their 
subdivision into specialized labor, represent one of the 
most potent means for the accumulation of wealth. A 
successful division of labor can only be had in a relatively 
dense and well-organized community. This is marked 
not only in the utilization of labor, but also of capital. 
Capital seeks its best use and highest remuneration in a 

153 



ECONOMICS FOR HIGH SCHOOLS 

company of diversified industries and interests represented 
in a highly organized industrial community. 

136. General Results of Irrigation. — Thus we shall 
find that irrigation may become a means of developing a 
permanent industrial life ; of reducing uncertainty of agri- 
culture to certainty; of removing restlessness and discon- 
tent. It will furnish a means of development of a higher 
industrial organization, including a division of labor, 
which will furnish a means for the rapid accumulation of 
wealth. It will insure better educational facilities and 
a higher educational standard. It will develop better social 
conditions. It will elevate the religious life and develop 
the religious nature. It will furnish an opportunity for 
a higher political development, which shall be conducive 
to good government and the administration of justice. 
Therefore, with better schools and churches, with better 
means of social enjoyment, with a more perfect and 
satisfactory government, with good roads for rapid com- 
munication, with the use of the telephone and electric 
light, with a better water supply and a more perfect sanita- 
tion, w^ith a daily mail carrying the news to every farm- 
house, all of which are dependent upon a relatively dense 
population, farm life will be made the most attractive and 
wholesome life of the land. And these conditions, brought 
about by irrigation, may be extended to the fertile districts 
receiving sufficient natural rainfall, until we shall find that 
farm life, so uncertain and unattractive in the past, shall 
become the most attractive of all occupations, on account 
of its freedom and its social and political conditions. Then 
let us hope that the young man will return from the college 
to the farm and help his fellow in building up the most 

154 



LAND AS A BASIS. OF PRODUCTION 

free, enlightened, and attractive communities found any- 
where in this broad land. It is dangerous to prophesy, 
but the writer will conjecture that within fifty years in 
the United States there will be a change in the attitude 
of young men of good ability. Instead of seeking the law 
and medicine, and commercial and educational positions, 
they will return to the farm, where they will find full scope 
for their educated abilities in the industrial, social, economic, 
and political life which it offers. 

137. Forests and Fisheries. — As land considered as a 
factor in production includes all of nature, w^e find that 
one product of America has been greatly neglected. The 
enormous waste of the spontaneous growth of forests in 
the early agricultural history of the nation reached the 
extent of prodigality. The ax and the firebrand made 
way for the crops of corn and wheat. No attempt was 
made to save growing forests and leave a source of enor- 
mous wealth to succeeding generations. We have few 
timber laws in the United States for the protection and 
cultivation of forests, as they have in many states of the 
Old World. Some few laws have been made for encourag- 
ing the planting and care of forests, but they have had but 
little influence. There are, however, some public parks in 
the United States which are termed Indian and military 
reservations, having the protective care of the United States 
Government, and some care has been taken to protect some 
of these parks from devastation. But the sawmill has 
penetrated the great forests of the West and Northwest 
and taken out the best of the timber, and destroyed that 
which was young and growing. The waste of forests can 
scarcely be estimated. 

^S5 



ECONOMICS FOR HIGH SCHOOLS 

Twenty-five billion cubic feet of wood is consumed 
annually in the United States, which is more than the 
forests of the United States annually produce. That is, 
it is equivalent to the wood growth of five hundred million 
acres, which is far in excess of the forest acreage of the 
United States. It would be wise in the Federal Govern- 
ment to oversee the forests on lands yet unoccupied, and 
to preserve them. Foresters should be appointed to mar- 
ket the wood and care for the growing timber. 

The United States has been more judicious in the estab- 
lishment of fisheries for increasing the fish food supply 
of the United States. Nothing is more important than 
the stocking of our lakes and streams with fish to make 
up for the loss entailed by constant consumption. Every 
effort of the Government to increase the universal supply 
of food advances the means of civilization. It improves 
the economic conditions of the nation and is of vast im- 
portance in the shifting of economic conditions. 

138. Land Tenure. — Whether the United States would 
have done better to adopt a different form of land tenure, 
by which the nation retained a large domain of forest 
and arable land which it could exploit by tillage or rental 
for the increase of the public revenue and the prevention 
of too rapid increase of agricultural area and the wanton 
destruction of forests, is not easy to determine. It was 
customary for the nations of the Old World to have such 
a domain. England, through the influence of economic 
writers, — among w^hom was Adam Smith, who pointed 
out the failure in the administration of these lands, — 
gradually abandoned the idea of national holdings. 

In the Roman system the ager puhlicus was a source 

156 



i 



LAND AS A BASIS OF PRODUCTION 

of great contention, distrust, and political corruption. 
The Spanish nation, in its colonization, had a method of 
setting apart a portion of the territory for the payment 
of the expenses of government. 

The United States established a policy of small farms 
in the beginning. In the colonial period there was a 
tendency to adopt the European system, which descended 
from the feudal custom of having large tracts with small 
tenant farmers. But this system could not survive under 
the spirit of American institutions. As above stated, the 
law of 1787, which provided for the survey of public lands 
in the Northwest territory, favored the division of the land 
into small farms, allowing any person who desired a farm to 
purchase it at a minimum price of the Government. The 
National Government has received large amounts from the 
sale of these lands for the support of the public treasury. 

In the case of the admission of new states, two town- 
ships of land were devoted to the foundation of a univer- 
sity, and two sections out of each township for the support 
of public schools. This, with little variation, has been 
the rule in the case of all states since 1803, when Ohio 
became a state. Again, in 1861, two townships of land 
were donated to every state in the Union for the founding 
of an agricultural and mechanical college. Other lands 
have been devoted to internal improvements. 

The policy of the United States has been to sell to pri- 
vate individuals the great bulk of our agricultural land. 
These lands are nearly all taken, and succeeding genera- 
tions cannot hope to greatly extend the agricultural area, but 
must be content with intensive cultivation of farming lands 
already in use, or must find occupation in other pursuits. 

157 



ECONOMICS FOR HIGH SCHOOLS 

This fact of the growth of population and the Hmita- 
tion of the extent of agricultural area, coupled with the 
fact that the present possessors of the soil are owners, 
and therefore new generations have no right or title to 
the land which their fathers found and occupied, except 
through inheritance or purchase, have led many enthu- 
siasts to advocate land nationalization. They base their 
arguments upon the theory of the natural right of man 
to an equal share in the soil which God has given to 
the whole people and not to any particular class. They 
advocate land nationalization, or that all the land be in 
charge of the Government, and that individuals should 
hold or rent their lands of this landlord, who represents 
the whole people ; that the rental paid should go into the 
treasury in lieu of taxes. While there seems to be a 
phase of justice in such argument, the whole plan appears 
to be impracticable. The United States, having adopted 
another policy in the disposition of our public lands, 
will find it no easy task to reverse the plan by an entirely 
opposite method. Whether it might have been better 
to adopt a plan of land nationalization in the beginning, 
is a disputed point. It might safely be said, however, 
that the Government could have been less prodigal with 
her lands, developed the agricultural area less rapidly, 
and yielded a larger net product of the industry of the 
nation in proportion to the expenditure. 

References. — Walker, Francis A., "Land and Its Rent"; 
Commons, J. R., "The Distribution of Wealth"; Ricardo, David, 
"The Principles of Political Economy and Taxation" ; United States 
Census, 1890 and 1900; Mead, EUwood, "Irrigation Institutes." 



158 



I 



CHAPTER XIV 

LABOR AS A FACTOR IN PRODUCTION 

139. Service of Labor. — It is primarily only through 
the power of labor applied to land or to the forces of 
nature that finished products, called wealth, are created. 
Labor is human exertion directed toward the production 
of wealth. It may be either directly or indirectly occupied 
in the process of production. Labor is either physical 
or mental; it is the " aggregate of those mental and 
physical capabilities existing in the human being, which 
he exercises whenever he produces a use value of any 
description." The person who is creating, either directly 
or indirectly, a product which is exchangeable in the 
market, or who is rendering some service to be sought 
for and paid for, is a producer of wealth or economic 
goods. According to Mr. Roscher, labor is usually em- 
ployed first in the occupation and use of nature's products, 
such as natural fruits, fertile land, mines, and forests, as 
well as mineral springs and other products of nature; 
second, labor is employed in invention and discovery, 
for a great part of man's time is spent in devising new 
methods of operation, and in the discovery of new ele- 
ments of nature as well as their effects upon economic 
life, and also in extending the territory and increasing 
the number of nature's products; third, labor is employed 

159 



ECONOMICS FOR HIGH SCHOOLS 

in creating raw materials by the manipulation of nature's 
forces, such as the raising of timber, grain, wool, flax, 
cotton, etc.; fourth, by changing raw materials into fin- 
ished products, such as the manufacture of machinery 
from the products of the mine and' the forest ; fifth, dis- 
tributing things already produced, giving them place 
value by bringing them near the consumer; sixth, exchang- 
ing wealth products, so as to satisfy wants and enhance 
the value of articles; seventh, securing the person of the 
individual, by laws, government, and police force, while 
he is engaged in all these processes; eighth, imparting 
instruction, either religious or secular; ninth, directing 
the labor of others, which is among the most important 
phases of economic production ; and finally, making laws for 
the protection of the people and their general welfare. In 
these principal occupations labor finds its service, and 
from them receives its reward. 

140. Extent of the Labor Force. — The progress of a 
community in wealth making, other things being equal, 
depends upon the extent of the labor force, for up to a 
certain point a community is productive according to the 
extent of the labor force. Labor force will be great as 
the population is large, if we consider a long period of 
time. By the extent of labor is meant the number of 
hours actually employed in rational service, as well as 
the quality of the labor. In some nations labor force is 
measured by the excess of births over deaths. In another 
way the restriction of emigration and the encouragement 
of immigration of able-bodied persons will have a tendency 
to increase the labor power. Also, labor force is esti- 
mated in proportion to the small number of idle and in- 

160 



LABOR AS A FACTOR IN PRODUCTION 

efficient persons in comparison to those who are self- 
supporting and able-bodied. Again, it may be further 
stated that for efficiency of labor force the number of 
males should to a certain extent exceed the number of 
females. In estimating the efficiency of labor in a com- 
munity, persons between fifteen and seventy years of age 
represent the strongest labor force. Those under fifteen 
and over seventy are generally regarded as more or less 
dependent. In France, 68.06 per cent is numbered be- 
tween these ages; in England, 61.02 per cent; in Ger- 
many, 62.06; while in the United States only 59.06 
per cent are between the ages of fifteen and seventy, 
— showing the efficiency of the labor force in France in 
proportion to the population as compared with the 
United States and other countries. The relative efficiency 
of nations may gradually change. It appears also that 
the number of defectives, dependents, and delinquents 
of the United States is large in comparison with France 
and other countries. In the United States 469 out of 
every 100,000 belong to this class, while in France 405, 
Belgium 226, Sweden 407, Norway 532, Great Britain 
452, Germany 410, Italy 343, of each 100,000, belong to 
this class. This is a statement of economic conditions 
rather than a sociological defect, as in the case of the 
United States the defectives are carefully enumerated 
and well cared for. 

141. Quality of the Labor Force. — While much 
depends upon the extent and general character of the 
population for effective labor power, the quality of the 
labor has much to do with its efficiency. Thus, strong, 
temperate, industrious men yield a larger return in the 
M 161 



ECONOMICS FOR HIGH SCHOOLS 

production of wealth than weak, intemperate, and shift- 
less laborers. It is evident that a class of laborers ener- 
vated by living in a warm climate will not do as much 
work as those of a temperate climate, on account of the 
languor which possesses them. The spirit of the laborer 
is also to be considered, for a well-kept, well-fed, inde- 
pendent, and happy, or at least contented, laborer is of 
far greater economic value than a poorly fed, poorly 
clad, discontented individual. Good wholesome food 
and a sufficient amount of it are conditions necessary to 
the best quality of labor. Also, the native strength of 
laborers has much to do with their efficiency in production. 
The character and quality of work done depend upon the 
spirit and will power of the laborers, and these, in turn, 
depend largely upon the moral and intellectual charac- 
teristics. While labor is divided into intellectual and 
physical, even physical labor must have intelligent direc- 
tion; therefore the intelligence of the laborer has much 
to do with his efficiency. Therefore, for the best service 
of labor, it is eminently proper that supervision should 
be had over sanitary conditions, the homes, the kind of 
food employed, and social condition of the laborers, in 
order that their highest service may be obtained. 

142. Various Grades of Labor. — The lowest grade of 
labor that is employed is slave labor, for the slave has 
no interest in the amount or quality of the work done. 
He has no interest in the finished product and no interest 
in the care of tools or property; having no political or 
social status, he does not work with hopeful energy. In 
the ordinary wage system a higher grade of skill is pos- 
sible than in slave labor, because the individual has politi- 

162 



LABOR AS A FACTOR IN PRODUCTION 

cal and civil rights guaranteed to him. He is his own 
master, and able to make his own contract. His pay, 
instead of being determined by the lowest animal wants, 
is determined by the kind and character of the work done. 
Nevertheless, in modern times we do not find him a con- 
tented and hopeful laborer, on account of the uncertainty 
of employment. And it is somewhat to his discredit 
that he has less interest in the quantity and quality of the 
work done and the care of materials and tools than he 
ought to have. While in one sense his interests are iden- 
tical with those of his employer, he has not always worked 
in his employer's interest. 

The piece wages system, or the piece price plan, is in 
some respects of a higher order than the wage system, 
for in this case the pay is determined by the actual amount 
accomplished, and the individual receives greater encour- 
agement while the work lasts; having an interest in the 
amount done, he puts forth all of his energies, which 
unfortunately frequently sacrifices quality and character 
of service. 

Men who are employed in profit sharing, or in coop- 
eration, have the highest ideal system of labor. While 
they have the privileges of the highest grade of wage- 
earners, they also have a direct interest in the care of 
tools and material, and in the amount and quality of 
service rendered. They have also an interest in the sur- 
plus earnings of capital and labor over and above actual 
wages paid. This gives them a hopeful and cheerful 
disposition. Wherever cooperation can be successfully 
carried on, it has a tendency to enhance the efficiency 
of the labor power and to raise the standard of life, thus 

163 



ECONOMICS FOR HIGH SCHOOLS 

creating better social conditions. But it seems scarcely 
possible that this can be entered into under all circum- 
stances. 

143. Division of Labor. — The quantity of wealth 
produced is greatly increased by the division of labor. 
This increases its utility in every way, although not with- 
out certain economic defects. By the division of labor 
is meant, that each individual, instead of attempting to 
obtain directly or to create all of the goods which he 
needs for consumption, performs a small part of the 
creation of a single article and exchanges this service 
for the supply of all his other wants. By this method 
the time of apprenticeship is greatly shortened, and the 
laborer soon develops extraordinary dexterity or skill 
in performing a single service. There is also a great 
saving of time, for each individual is kept in one place 
and at one employment ; for the same reason, it is a saving 
of mental and physical strength. Division of labor also 
furnishes an opportunity for the distribution of abilities; 
as men are endowed with different characteristics and 
capacities which fit them for different occupations, so 
the division of labor makes it possible to fit each one to 
his proper place. Each one seeking to perform a single 
service in the easiest possible manner has facilitated 
invention. It prevents waste and saves interest and 
insurance by direct service. It is the concentration of 
the attention of the laborer on a single process that enables 
him to devise methods of saving labor. The improve- 
ments in the steam engine, in taking the seeds out of cotton, 
in the equipment of shoe factories, cotton mills, and iron 
and machine shops, have come about in this way. The 

164 



LABOR AS A FACTOR IN PRODUCTION 

machine grows from a simple, clumsy device to a com- 
plex, perfectly acting instrument by the perfection of 
a single part at a time. Division of labor allows women 
and children and " half-men " to work, thus enabling 
them to contribute to their own support, economizing 
the labor force of a community. 

But it is not without its evil effects; for in forcing 
the mind to perform only one service, it has a tendency 
to make the laborer narrow, to decrease his general intelli- 
gence, and to render him unacquainted with the relations 
of things. It also tends to a closer competition of labor, 
and for a time hinders the mobility of occupation; but 
this is gradually being broken down, because of the excess- 
ive division of labor and the use of machinery which 
renders it possible for a laborer to learn in a few days 
or a few weeks the processes of a single occupation. The 
chief danger of the excessive division of labor has been 
in the excessive inducements offered to children to work, 
long before they are ready for the ordeal. This has been 
prevented to a certain extent in modern times by restrict- 
ive laws. 

144. Cooperation of Labor. — All laborers appear to 
be competing with one another in general, and especially 
within the different groups. The rate of wages is deter- 
mined to a certain extent by the number of laborers 
demanding employment in comparison to the number 
sought, or, in other words, upon the law of supply and 
demand. Hence, when a vacancy occurs where ten 
laborers are needed, a hundred immediately appear, 
seeking the position. Yet in the creation of wealth all 
laborers are working unconsciously together in making 

i6s 



ECONOMICS FOR HIGH SCHOOLS 

goods more abundant, and consequently cheaper, and 
the means of life more satisfactory. Yet laborers, observ- 
ing the competition in the market, have sought to cooper- 
ate with one another in obtaining a higher rate of wages 
and in the satisfaction of social and economic needs. 
In doing this they have rendered one another great service 
in keeping up the standard of life, and, by agitation and 
education, advancing the rate of wages. 

145. Labor has thus continually increased its. Pro- 
ductivity. — Introduction of the machine and modern 
processes of production have enhanced the power of 
labor to create economic goods. By the aid of machinery, 
labor can accomplish more now in an hour than formerly 
in a lifetime. It is true that this is dependent somewhat 
upon the aid of capital; but in some industries labor 
does the greater part of the work, while in others capital 
performs the greater service, and labor does little. One 
of the complaints of labor in modern times is, that it has 
not received a fair share of the product of industry caused 
by the increased production consequent upon the use of 
machinery, the skill of labor, and a higher standard of life. 

146. Improved Condition of Labor, — It will be found, 
however, that the laborer's wages have increased gradu- 
ally from decade to decade; and this is evident from the 
improved condition of labor. The homes are better; 
the improved intellectual and moral conditions of labor 
are evident everywhere. Better food, better clothing, 
and better home comforts represent the improvement 
of labor during the past fifty years. It must be remem- 
bered in considering these questions, that periods of 
depression in which thousands of laborers are thrown 

166 



LABOR AS A FACTOR IN PRODUCTION 

out of employment must be considered as abnormal con- 
ditions, and in the economic sense the average improve- 
ment of the laborer must be taken as the basis of meas- 
urement of his welfare. 

To a large extent this has been due to the exertions of 
the laborer himself. Improve the condition of a laborer, 
and he will command a higher rate of wages; pay him 
a higher rate of wages, and he will have the means of 
improving himself. Thus is perpetuated a favorable 
condition of labor. But it is through labor organiza- 
tions that more has been done to educate the people to 
consider favorably the demand for better wages. Possibly 
wages have been advanced through strikes and close 
organization; but chiefly through the development of 
temperance, the improvement of the general social con- 
dition, the increased intelligence of the laborer, making 
him a better laborer, improvement in wages has taken 
place. Labor organizations have sought to create a 
monopoly of labor to compete with a monopoly of capital. 
They have tried to shut out of a given field all laborers 
not belonging to their organization. Yet labor organiza- 
tions have not been without their own defects, as they 
have failed to develop a broad and catholic spirit among 
laborers, and in spite of their education have failed to 
realize the best results of broad citizenship and intelli- 
gent humanity. They have developed a selfishness 
which has in many respects been detrimental to their 
best interests. 

147. Protection of Labor. — The world is slowly learn- 
ing that the labor force of a community is its best wealth, 
and that it needs protection. Those employers who 

167 



ECONOMICS FOR HIGH SCHOOLS 

look carefully to the interests of their laborers receive 
a large reward for their services. Laborers are receiving 
protection in very many ways. The laws guarantee them 
the right now to organize, to assemble peaceably, and 
to strike when their interests seem to demand it. There 
was a time when these privileges were not permitted. 

A careful glance at the numerous labor laws which have 
been enacted in the leading nations and in the various 
commonwealths of the United States, which provide 
for sanitary conditions of buildings, for the protection 
of life and limb, for the guarantee of the wages of the 
laborer as a first lien on the product, for the security of 
the rights of contract, and many other matters, show 
conclusively how well laborers are protected by law. 
Gradually each year we find everywhere measures enacted 
for the protection of the laborer in mines and factories. 
The establishment of labor commissions in over thirty 
states of the Union, for the purpose of gathering statistics 
and information concerning the condition of labor, has 
had a vast deal to do with the amelioration of the condi- 
tion of labor and the protection of the laborer. Through 
these statistics and the united efforts of laborers many 
laws have been enacted in their favor. Here, as else- 
where, in all remedial legislation, grievous errors have 
been committed, which can only be remedied by time 
and increased intelligence on the part of the laborers 
who make the demands and on the part of legislators 
and philanthropists who endeavor to advance their cause. 

148. Eight-hour Law and its Effect on Production. — 
Strenuous efforts have been made by labor organizations 
to raise the rate of wages and to reduce the number of 



i 



LABOR AS A FACTOR IN PRODUCTION 

hours of labor. It may be stated as a fact, that the gen- 
eral well-being of society would be promoted if each 
individual would labor eight hours a day, provided that 
this labor could be faithful and continuous and that the 
remaining portion of time, not used in sleeping and eating, 
should be devoted to self-improvement and wholesome 
recreation. The rapidity of the production of wealth in 
the world has not always been conducive to the highest 
well-being of society, on account of the sudden changes 
that occur in economic life. While a large number of 
people labor excessive hours, others are falling short 
of this average to a considerable extent, but it is the 
service of labor rather than its amount that yields general 
social well-being. 

The economic effect of suddenly changing from ten 
to eight hours would be diverse in different industries. 
In some instances, where the labor is severe, more would 
be accomplished in eight hours than in ten; while, on 
the other hand, where time and the use of machinery 
are chief elements, less would be accomplished in eight 
hours than in ten. Taking an average of industries, it 
will be found that less will be accomplished in a day of 
eight hours than in one of ten; while considered by the 
hour, more will be performed in a given hour in an eight- 
hour day than in a ten. In considering the change from 
a ten-hour to an eight-hour day, people seldom consider 
the effect on general production. If the same could be 
accomplished in eight hours as in ten, the question arises 
as to whether there would be an increased employment 
of the number of men; if the demands of production 
can be accomplished in eight hours as well as in ten, the 

169 



ECONOMICS FOR HIGH SCHOOLS 

shortening of the day would not, as the unionists hope, 
ffive room for an increased number of laborers. On the 
other hand, if less can be accomplished in eight hours 
than in ten, will not wages necessarily fall by the day 
though they may rise by the hour ? The question involves 
many economic considerations, for it must consider the 
amount of capital seeking employment, and the increase 
or decrease of the number of laborers seeking employ- 
ment, and the effect on wages ; it must consider the amount 
of increase or diminution of the total product of industry, 
and the increase or decrease of the amount of land used 
in obtaining the product and the rent of the same; and 
finally, it must include the increase or decrease of the rate 
of profits which accrue to the managers of the business. 
It will be seen that the real economic effect is determined 
by its relation to all productive and distributive industries. 
Whereas a general benefit would be derived if such a 
change would take place, it is difficult for the laborer to 
realize such a benefit in the form of increased remunera- 
tion for his services. If such a change takes place i| 
should occur gradually, so that different industries coulc 
be adjusted to meet the new conditions. 

149. Restriction of Immigration. ^The great attempi 
of labor unions to limit the number of laborers entering* 
a given field, and thus create a monopoly of labor, has 
been a cause frequently urged for the restriction of immi- 
gration. As wages would depend upon the number of 
laborers seeking employment in comparison with the 
demand, if laborers should be kept out of a nation by 
means of a well-regulated law it certainly would have a 
tendency to raise wages. Efforts have been made on the 

170 



LABOR AS A FACTOR IN PRODUCTION 

part of the United States to keep out the low-grade labor 
of China, and, more recently, other countries of Europe. 
It appears that if labor is to be protected in our own 
nation and a higher standard of living is to be preserved 
here than that which obtains in the Old World, it is nec- 
essary to establish some restriction of this kind. How- 
ever, as every group of able-bodied laborers in a com- 
munity where there are resources to be developed and 
capital seeking investment pays its own wages and adds 
to the wealth of a community, the evils of competition 
are greatly exaggerated and the reasons for restriction 
of immigration overestimated. The only value of restric- 
tion is to protect a country while it is adjusting itself to 
new conditions. In every prosperous country there is a 
demand for cheap labor along with high-grade labor. 
Hence the admission of a limited number of laborers 
whose standard of life is not high may be a benefit to 
the country admitting them and to the laborers. One of the 
arguments for keeping up the standard of life and raising 
the wages of laborers, used by certain politicians, is to 
institute a high protective tariff which will develop the 
industries of the country, make a demand for labor, and 
thus increase wages. It is difficult to see how this can 
be effective except in a very general way. The question 
will be further discussed under Taxation. 

References. — Walker, Francis A., "Wages"; Ely, R. T., "The 
Labor Movement in America"; Howell, G., "Conflicts of Capital 
and Labor"; Mallock, W. H., "Labor and Popular Welfare"; 
Walker, Francis A., "Political Economy"; Stimson, F. J., "Hand- 
book of the Labor Law of the United States." 



171 



CHAPTER XV 

THE POSITION OF CAPITAL IN PRODUCTION 

150. Nature of Capital. — Capital is absolutely neces- 
sary in nearly all forms of modern production. Having 
its origin first in labor, it finally, in turn, supports labor in 
the process of production, and may even limit the amount 
of labor that may be employed in a given territory. In 
the building up of industries, labor logically preceded 
capital; but in the practice of modern production, capital 
takes the initiative. Thus, labor first produced wealth, 
and the part of wealth set aside for the purpose of creat- 
ing more wealth was called capital. All wealth which is 
not used directly in consumption as such, without regard 
to the creation of other wealth, may be called capital. 
Capital is wealth set aside with the determination of 
use in the process of creating more wealth. But capital 
itself is consumed more or less rapidly, although in every 
process of production it reproduces itself. The whole 
body of capital is consumed rapidly, and reproduces 
itself rapidly; so that the existing capital of the world 
is of very recent origin. Capital is said to be immaterial; 
some persons classifying as immaterial capital good will 
in business, credit, superior skill, etc. But these could 
nearly all be referred to some other category rather than 
to capital. Although this is a question of dispute, it is 
better to classify all capital as material and objective. 

172 



POSITION OF CAPITAL IN PRODUCTION 

The forms of material capital, as given by Mr. Walker, 
are generally included in materials to work up, tools to 
work with, and subsistence. A more analytic classi- 
fication gives the forms of material capital as follows: 
improvements upon land, as well as all buildings, streets, 
and roads; tools, instruments, and machines; useful 
domestic animals; materials for manufacture which 
reappear visibly in the product; food and clothing for 
the support of laborers; materials for manufacture which 
will not reappear in the product; stocks of goods for sale; 
money; means of transportation; and weapons for de- 
fense. It will be seen from this that the wealth used 
otherwise than in the form of capital is comparatively 
small. But the fundamental idea in capital is, that it 
shall either yield a revenue, produce more wealth, or pro- 
vide for future income and future enjoyment. The whole 
tendency seems to be to make capital that form of wealth 
which is set aside for the satisfaction of future needs; 
while non-capital wealth is that which is used for imme- 
diate consumption, without regard to future use. Con- 
sidered in general, this is the essential definition of capital. 
However, wealth may be lying idle in the bank, w^th the 
intended use of production, which would be classified as 
capital. 

151. Saving and Abstinence. — Writers have frequently 
asserted that capital arises from saving and abstinence, 
and, whether intentionally so or not, have conveyed the 
idea that capital arises out of sacrifice or parsimony. 
But the real truth is, that capital is the surplus over and 
above the amount consumed, which is again turned into 
business in wealth production. The word "saving" is 

173 



ECONOMICS FOR HIGH SCHOOLS 

correct if properly understood. It is simply refraining 
from the use of wealth in one way, that it may be used in 
another. It is the intention always to use capital, but 
not to consume it without leaving its equivalent plus a 
marginal return in some form of wealth. There may be 
present self-denial for the sake of a larger future enjoy- 
ment, or the refusal to use wealth in one way that it may 
yield a larger amount of rational enjoyment in some other 
way. At any rate, economy of consumption has a ten- 
dency to enlarge the amount of capital. 

152. Fixed Capital and Circulating Capital. — It has 
been convenient to classify the different forms of capital 
in regard to methods of consumption into fixed and cir- 
culating. The former includes all concrete forms of 
capital which are more or less permanently established. 
Circulating capital is that which is used in a single pro- 
cess of consumption, like coal, or raw material of any 
kind passing into the finished product. It must be under- 
stood that all concrete capital is consumed in the process 
of production, and that this classification is merely rela- 
tive in regard to the time used in consumption. It is 
desirable, in well-ordered production, that circulating 
capital should be consumed rapidly and that fixed capital 
should last as long as possible. Thus, in the consump- 
tion of coal, wood, or any raw material, it is desirable 
that it should be consumed rapidly because this indicates 
rapid production; while it is desirable that machinery, 
buildings, railroads, and all forms of fixed capital should 
last as long as they are efficient. 

153- Specialized and Free Capital. — Capital is again 
classified, in reference to investment, into specialized 

174 



POSITION OF CAPITAL IN PRODUCTION 

and free. It is said to be specialized when it is bound 
up in a given business from which it cannot be withdrawn 
without loss. Thus, if a man should have $10,000 in- 
vested in a stock of boots and shoes, it would be impossible 
for him to withdraw this capital instantly and invest it 
in grain or flour without loss. He must wait the slow 
process of trade or sale. On the other hand, free capital 
is usually in the form of money or securities which are 
immediately transferable and are awaiting investment. 
It takes a large amount of free capital to run any estab- 
lished business. And the amount of business which 
may be carried on is to a certain extent limited by the 
amount of available free capital. All new business must 
be developed through the use of available or free capital, 
upon whose service the business prosperity of the com- 
munity is largely dependent. Unless it be plentiful, 
new business cannot be established; and unless there 
be sufficient to run the old business, it will fail. Business 
communities have frequently suffered on account of the 
absorption of all free capital in given industries and a 
deficiency of the supply to carry on business. When 
large amounts of property pass into the form of fixed 
capital which fails to yield a return upon the investment, 
or when large amounts of capital are specialized in the 
form of stocks of goods or materials for which there is 
no immediate demand, business is in a bad condition, 
and there is danger of a commercial crisis, or trade de- 
pression. 

154. Pure and Concrete Capital. — When the term 
"capital" is used, it generally has reference to what is known 
as pure capital, and not to the concrete forms. For 

17s 



ECONOMICS FOR HIGH SCHOOLS 

example, a merchant, when he talks of his capital, gen- 
erally estimates it as so many dollars, without reference 
to the concrete forms of his capital stock. A large pro- 
portion of his capital may be in the form of goods, such 
as bolts of calico and other forms of merchandise; but 
these may change from time to time, the same articles 
not remaining in the store, but being sold and replaced 
by others, — yet the capital may remain the same. In this 
rapid manner pure capital is said to transmigrate from 
one form to another. The largest proportion of capital 
is found in the concrete forms of economic goods or 
wealth, and the estimation of the value of these, in terms 
of money, represents capital. 

155. Accumulation of Capital. — It is generally sup- 
posed that large masses of capital are handed down from 
generation to generation with no economic process except 
that of investment, but this idea is not correct ; for, although 
capital is saved, it is saved to be consumed, and replaces 
itself rapidly. Some authors have discarded the idea of 
the accumulation of capital, and have used the term 
"growth of capital " as preferable because of its constant 
power of reproduction, holding that the increase of capital 
is largely analogous to the increase of population. The! 
creation of capital depends largely upon the direction 
given to industry. Any one who has command over a 
certain amount of free capital has a direct or indirect 
control of a corresponding part of the productive powers 
of industry. There are various ways in which he may 
use this free capital. He may give employment to labor 
in the development of industry which will enable capital] 
to reproduce itself and perform a service in other ways. 

176 



POSITION OF CAPITAL IN PRODUCTION 

The capital will then be replaced with a margin of 
increase which is called profits. He might use it for 
immediate gratification by extravagant expenditure in 
costly suppers, but he prefers the former, and the 
result is the growth of capital. The process of the 
growth of capital consists in the increase of the fund of 
wealth from which savings may be made, and the deter- 
mination on the part of its owners to refrain from imme- 
diate consumption, and divert wealth into the form of 
productive industry. The former represents the direct 
method of the creation of wealth, the latter that of saving 
it for future gratification. The desire for accumulation 
has been present in economic life, and has increased with 
the diversity of occupation. It is inherent in the nature 
of man, and influences largely the will in its determina- 
tion not to consume goods, but to preserve them for future 
use. 

156. Momentum of Capital. — The services of capital 
in modern production have become so very great that its 
power actually increases with its own momentum. Many 
find fault with capitalists, as a class, because it appears 
that they are all working in combination against labor. 
In reality each one, like the laborer, is seeking to receive 
the largest return for services, either in present or future 
gratification. In present gratification he obtains this 
satisfaction by the lavish expenditure of wealth. He hopes 
to receive a larger future gratification by turning the wealth 
which he has in his possession into productive industry, 
and thus increasing his wealth, and consequently the means 
of future enjoyment. Where a large number of persons, 
each possessing wealth, enter a corporation and turn their 

N ' 177 



ECONOMICS FOR HIGH SCHOOLS 

attention to productive enterprises, each has an industrial 
power which is large in proportion to that possessed by the 
single wage-earner. This large number of men, moved 
by the same idea, the gratification of personal wants, make 
it appear that capitalists have all combined to carry out 
their own selfish aims. The momentum of capital in mod- 
ern industry is great, and, moving forward with its own 
inertia, its cumulative power is evident. The power of capi- 
tal, then, rests rather in its own inherent nature than in the 
combination of any group of men called capitalists. Others 
have uttered their objections to the modern system of 
capitalistic production, and, like the socialist, have advo- 
cated the shifting of the management of capital from a 
few hands into the hands of the state. But change as we 
may the management of capital, its power in production 
will not cease. 

157. Economic Significance of Capital in Production. — 
Capital is not only essential in modern production, but 
frequently is a limit to productive industry. As it takes 
the initiative in constructing buildings and machinery and 
providing raw material, the amount of industry will be 
limited by the amount of available capital that may be thus 
used. It matters not what form of productive industry 
may be practiced, — whether it is individualistic, socialis- 
tic, communistic, or cooperative, — capital is the essential 
feature to be considered in the beginning of any modern 
enterprise. Even those persons who begin a cooperative 
industry in any enterprise of the smallest scale must have 
room to work, material to work upon, and tools to work 
with, before they can accomplish anything. It was main- 
tained by John Stuart Mill and other economists that capi- 

178 



POSITION OF CAPITAL IN PRODUCTION 

tal was used for the payment of wages, and that only a cer- 
tain number of men could be employed, determined by the 
amount of capital devoted to that purpose, called a wage- 
fund. But more recently it has been generally held that 
the laborer earns his own wages each hour, day, or week 
that he works, and that capital merely provides the means 
of employment. But as the limited means of employment 
show the limitation of laborers that may be employed, 
the effect is the same as if the theory of the wage- fund were 
a fact. It is impossible to estimate the place of capital 
in production as compared with labor, but in the modern 
system of production capital has become an absolute 
necessity along with labor. 

References. — Giffen, R., "The Growth of Capital"; Clark, 
J. B., "Philosophy of Wealth"; Nicholson, J. S., "Principles of 
Political Economy." 



179 



CHAPTER XVI 

PRODUCTION INFLUENCED BY SOCIAL ORGANIZATION 

158. Private Organization. — Under free competition 
each individual seeks for the largest possible return for 
labor or sacrifice expended, but in seeking this return each 
works under limited opportunities. Owing to the fact 
that there are several factors in production, — land, labor, 
and capital, — it is necessary that the various forces in pro- 
duction be organized by some one in order that business 
may be carried on. One man owns the capital, another 
the land, and another has the right and control of his 
own labor. If these three were to come together, business 
might be facilitated on a small scale. But as a rule this 
question of bringing land, capital, and labor into combined 
effort is settled by a group of people called managers of 
business, or sometimes captains of industry. A person 
who has the power to labor for wages may not have the 
ability to conduct business, and possibly not the opportu- 
nity. Owing to the fact that large amounts of capital, labor, 
and land are essential to most modern enterprises, it re- 
quires a large amount of business skill and ability to carry 
on such work successfully. But few men have the ability 
and skill to carry on a great business enterprise. These 
organizers of industry induce capitalists to loan their 
money, build machines, and construct factories and 

180 



PRODUCTION INFLUENCED 

provide the raw material, hire laborers and manage the 
business, returning to capital interest, to land its rent, to 
labor its wages, and retaining for themselves the profit 
of management. Here, then, we have a distinct class of 
people representing business management, the fourth great 
factor in production. Too much importance cannot be 
attached to this factor in the modern business, for, after 
all, it is brain power or successful management which 
more than anything else makes a business profitable 
or unprofitable. And it is the application of this superior 
skill which moves the wheels of industry and causes wealth 
to accumulate. 

159. Firm or Partnership. — In .private organization 
there have arisen from time to time different voluntary 
combinations of men who have been induced to organize 
on account of economic conditions. The development of 
these organizations, though in themselves voluntary, 
may be said to be natural on account of their essential out- 
come of previous conditions. In early times the manu- 
facturer lived in his own home and gathered about him 
apprentices and helpers, and when articles were made he 
sold them from his own shop. He conducted his business 
alone, with a very small amount of capital and a compara- 
tively small amount of labor. But after the invention of 
steam and the rapid development of power manufacture, 
industrial enterprises became much larger, and men be- 
gan to associate others with them in the business of manu- 
facturing or trading, and the partnership developed as one 
of the voluntary associations of modern production. 

160. The Corporation. — As industry became more 
complex, enterprises became more extended, and the 

181 



ECONOMICS FOR HIGH SCHOOLS 

establishment of industries which called for a still larger 
amount of capital became necessary. A larger number of 
individuals went into partnership in production, in the 
establishment of banks, insurance companies, the building 
of railroads, and the development of land and mining inter- 
ests. As a large number of persons doing business to- 
gether without the personal responsibility for all, they be- 
came a menace to trade and general business. In order 
that these institutions might be legally created and that the 
people might have protection, they were incorporated by 
the municipality or state. They were then in the form to 
sue and be sued, and they could be to a certain extent under 
the control of law and could be made responsible for in- 
debtedness. It is not the place here to discuss the imper- 
fections of franchises and of corporation laws, or to show 
how, through the carelessness of the governed and the 
faithlessness of the governing, these corporations frequently 
became unjust machines for arbitrarily oppressing those 
who were not so carefully organized. The corporation 
came into use as a voluntary organization of industry, 
became an essential of the mechanism of modern industrial 
life, and as such now performs an immense service in pro- 
duction and at the same time wields great power in the 
political as well as in the industrial world. 

i6i. Trusts and Combinations. — As industry developed 
and power manufacture increased through the extended 
use of steam, electricity, and water transportation, the 
industrial enterprises of the world became greater. Com- 
petition, which had been to a large extent shifted from 
individuals to corporations, became a battle of giants in 
production and distribution. Corporation was contending 

182 



PRODUCTION INFLUENCED 

with corporation. The result of extra competition in indus- 
tries and the cheapened methods of production caused a 
fall in prices. Certain institutions could not make fair 
returns on investments of capital, and so they placed goods 
on the market below cost of production. This created such 
a distrust in business and such a depression of prices that 
there arose a method of agreeing upon a fixed price of goods 
in a given line. This method of arranging a price for all 
goods of a given trade is a method of combination, and is 
for the purpose of allowing the least productive business 
in any given line to pay at least the cost of production, and 
the more favorably located institutions to yield a surplus 
return. Sometimes combination has been made between 
manufacturers and transporters of goods for the purpose 
of arranging rates and controlling the market. 

But the most important and interesting phase of this 
subject is the extension of organization, in which all indus- 
tries in a certain line pass into a super-organization called 
a trust, but which in reality becomes a gigantic corporation 
with monopoly power. Generally, stock in the trust is 
issued in proportion to the amount each corporation puts 
in. So, having formed this trust, or corporation of cor- 
porations, the unprofitable enterprises are closed, and only 
a few of the more profitable are continued in business. If 
the business will warrant it, all of the different institutions 
are kept running. At any event, they are run or closed as 
will best suit the interests of the trust. Having assumed 
control of the entire manufacturing interests in a given line, 
the next step is to fix a monopoly price, in order to obtain 
monopoly profits which depend upon the market. The 
object to be gained is the largest net return for a given 

183 



ECONOMICS FOR HIGH SCHOOLS 

amount of sacrifice, labor, and capital. This is not easy 
to secure, for the law of supply and demand here enters the 
field as a determining power. This law assures us that if 
prices fall there will be an increased demand for goods, 
but not essentially in proportion to the fall. If prices rise 
there will be a falling-off in the demand for goods, but not 
essentially in proportion to the rise in the price. Expenses 
of management will increase in a certain proportion in 
respect to the amount of goods handled, and decrease as 
the number of articles handled decreases. The question 
to be answered then is : At what price may the largest net 
returns be secured ? It is therefore not possible for a trust 
or monopoly to fix its price regardless of the demand, as it 
is limited in what it may charge for goods. Another 
limitation also on monopolies is found in the effect of pro- 
spective competition. If it be found that a trust has been 
making enormous profits in a given line, sufficient capital 
will be gotten together to compete with a trust, which, of 
course, makes the largest competitive units yet known. 
The threatened competition keeps prices within certain 
limits, which frequently brings them below monopoly 
profits. But more frequently the trusts themselves over- 
estimate the market and fix the monopoly price above its 
normal rate, and thus injure their own business. It is 
possible for a trust or great monopoly to furnish goods to 
consumers at a less rate than they can be furnished under 
competition of a large number of establishments. If they 
would only consent to be reasonable and fair in their 
charges, so as to make only reasonable income, there 
would be no better way of furnishing goods to consumers, 
for the price would be regular, and cheaper than when 

184 



PRODUCTION INFLUENCED 

furnished by competition of a large number of institutions. 
The chief danger of trusts is their monopoly power, which 
permits them to take undue advantage of the markets. 
They raise the prices of necessaries suddenly, before the 
influence of prospective competition acts. It takes a long 
time to get business in motion even after it is planned, 
and the sudden raising of the price of sugar, flour, or coal 
for a month will yield an immense income to a corporation 
with such power. This may be done in such a manner as 
to be little less than robbery of consumers, who must pay 
the arbitrary price fixed by the monopoly. 

162. Effect of Organized Labor on Production. — The 
organization of labor has a great influence on production, 
although the nature and extent of this influence is not easily 
defined. For while the organic action of labor may on the 
one hand keep a steadiness in the market, it frequently 
counteracts this result by creating a distrust in business, 
causing indirectly the discharge of many laborers who 
otherwise would continue to be employed. More espe- 
cially is this result observed in the timidity of managers to 
enter new business. Upon the whole, it may be stated that, 
as labor organizations become more prominent and more 
steady in their organization and more reasonable in their 
demands, their effect is to make stability of wages and to a 
certain extent to increase the rate. The labor service is 
greatly improved in quality, which of itself tends to increase 
the amount and the value of the product of industry. 
Could laborers and managers agree upon a method of 
establishing wages, such as a sliding scale or contract for 
a certain period of time, so that the business managers 
would know what to depend on, much advantage would 

185 



ECONOMICS FOR HIGH SCHOOLS 

accrue to industry. The agreement to settle everything 
by a joint arbitrating committee has worked well in several 
industries where it has been tried. If manufacturers and 
employers in general could count upon the stability of 
wages and the absence of strikes and other interferences 
of industry, production would be more regular, and com- 
modities could be placed on the market at a smaller cost. 

163. Effect of Political Organization. — The strength 
and stability of government has much to do with the 
stability of values, for the greater the security of property 
and labor, the fewer fluctuations of taxation brought about 
through extravagance or excessive demands, the more 
steady will values become. Every form of social organi- 
zation has its influence on values. The government has 
not the power to create values nor to destroy them directly, 
but it may so cooperate with individuals as to regulate 
production. It may also by consumption increase the 
demand for a commodity and thus advance its price, or 
by a certain law increase or decrease the demand for it, — 
thus influencing the market. The action of the govern- 
ment frequently materially affects markets. A good exam- 
ple of this is seen in the political uncertainty that occurs 
just before a presidential election in the United States: 
it influences business to such an extent as to cause stagna- 
tion in certain lines. The turmoils of some small nations 
frequently lead to a perpetual disturbance in business, 
rendering capital and all investments insecure. 

164. Increased Productivity on Account of Organiza- 
tion. — Thorough economic and political organization 
will greatly enhance the productivity of wealth, while, on 
the contrary, poor organization leads to distrust and to ex- 

186 



PRODUCTION INFLUENCED 

pensive and slow production. The influence of the firm, 
the corporation, and the trust on the rapidity of produc- 
tion is well known. The grouping of people in well- 
ordered homes, the creation of voluntary or involuntary 
groups wherein division of labor is practiced, enhances 
the power of production. By organized effort wealth is 
rapidly increased, because all of the forces of produc- 
tion are rendered highly efficient. 

References. — Hadley, A. T., " Economics " ; Ely, R. T., 
"Labor Movement in America"; Gide, Charles, "Principles of 
Political Economy "; Walker, F. A., " Political Economy." 



187 



PART III 

DISTRIBUTION OF INCOME 

CHAPTER XVII 

PRINCIPLES OF DISTRIBUTION 

165. Net Product. — The net product of industry is 
that which remains after all expenses of production have 
been paid. By expenses of production is meant only the 
waste or use of capital, which must be replaced, and the 
income over and above this is called the net product. In 
considering a given manufacturing plant from the stand- 
point of the technology of wealth getting, the net income 
would be that remaining after all expenses of rent, inter- 
est, wages, and expenses of management have been paid. 
But it must be remembered that the net product considered 
here is the amount distributed among the different eco- 
nomic groups represented ; namely, landlords, capitalists, 
wage-earners, and managers; or, in other words, into 
different shares, such as rent, interest, wages, and profits. 
The methods of distributing the net product are worthy of 
consideration. First, distribution of wealth in this connec- 
tion has reference to ownership of property rather than 
exchange of place or location on the earth's surface. 
Into whose hands does the net product fall? In investi- 



PRINCIPLES OF DISTRIBUTION 

gating the principles of distribution, it is well to assume 
their operation under laws of free competition. We are 
not concerned at present with the actual conditions of an 
industry instituted for the purpose of making money, but 
rather with the general laws arising from economic pro- 
duction without interference with concrete conditions. 
Indeed, all economic law that may be demonstrated to be 
final and exact must operate under the conditions of free 
competition. Every discussion of the abstract principles 
of political economy recognizes this fact. Interferences 
which may be caused by monopoly or by government are 
to be considered in a separate connection. 

i66. Nature of Distribution. — John Stuart Mill held 
that production is natural, and therefore its laws may be 
observed, but that distribution is artificial, consequently 
it is not possible to discover constant and certain laws. It 
is true that production is less interfered with by conscious 
human influences than distribution, the latter being dis- 
turbed in its natural course of free competition more 
readily than the former; but there is no reason for assum- 
ing that there are not natural processes in distribution as 
well as in production. The Socialists advance the idea 
that natural distribution, like natural production, is the 
only just method. The only difficulty in all this discus- 
sion is to understand what is meant by the term " natural." 
What the socialists consider natural distribution is finally 
settled when they discard the laissez-faire doctrine, or that 
of absolute freedom in competition, and insist that the 
state should regulate this just distribution, as it is the only 
body that has power to attend to it justly. Henry George 
states also that the " just distribution of wealth is mani- 



ECONOMICS FOR HIGH SCHOOLS 

festly a natural distribution of wealth, and this is that 
which gives to him who makes it and secures to him who 
saves it." Here, again, is the question of the use of the 
term " natural." It is evident that it is determined by 
purely a priori argument. 

It may be assumed that there are natural economic laws 
based upon the active conditions of economic society, but 
they do not assume a state of nature, for society is built 
up by a struggle against nature, or rather by the mastery 
of nature. In other words, the economic law of distribu- 
tion does not in any way precede the construction of eco- 
nomic society, and what might be natural distribution 
under hand manufacture might be unnatural under power 
manufacture. Yet in the consideration of the main facts 
of distribution, — that is, into whose hands the net product 
will fall under a state of free competition, — and in deter- 
mining upon what principles the net product of wealth 
passes into certain hands, we may appeal to general laws. 
Afterward we may consider the exceptions to these laws 
and inquire into their various interferences, for it is evi- 
dent that these laws do not consider the necessities of 
man nor the justness of distribution. They only ask what 
happens, and why. 

167. Divisions of Net Product. — The great problems of 
economic society have been stated as follows: first, how 
to create the largest aggregate of utilities, or of wealth; 
second, how justly to divide this amount; and third, how 
to make the product minister to the permanent rather than 
to the transient well-being of society. These problems 
go beyond the bare expression of economic law, and seek 
the ultimate of economic existence. With society putting] 

igo 



PRINCIPLES OF DISTRIBUTION 

forth its unconscious effort to create economic goods, and 
each group seeking to obtain the largest return for time 
and service in the form of weahh, it is found that the net 
product falls regularly into four categories: rent, interest, 
wages, and profits; to which is added sometimes, for the 
sake of convenience, a fifth category, called " anomalous " 
fortune, which is only a term to represent the unclassified. 
But how are we to determine the amount which will pass 
into each separate category? Is there a law which will 
determine this? It is easy to observe that the amount 
which goes to rent, interest, or wages, for instance, is quite 
a constant quantity. It is also conceded that the average 
profit from year to year remains about the same. But 
what determines the quantity which passes into each of 
the several categories? The surplus which obtains on 
account of excessive fertility or favorable location of land 
is called rent. Rent is easily determined as the difference 
between the return upon that land which will just pay 
expenses of cultivation and the return from more fertile 
land. If this principle is extended to other industries, 
monopoly or proprietorship of fixed material or conditions, 
the rent principle appears. Wages are held to be the re- 
ward of labor, distinct from the earnings of capital or any 
other agency. The laborer receives wages for his toil. 
The manager of business receives profits as his reward for 
ability to organize and superintend business. The capital- 
ist receives interest on account of his ownership of capital, 
and on account of the increase of the net product due to the 
services of capital. The fifth category, which is sometimes 
used, that of anomalous fortune, would include all those 
material goods not included in the preceding categories. 

191 



ECONOMICS FOR HIGH SCHOOLS 

The above statements represent the factors of the four cate- 
gories of distribution, 

1 68. Undivided Net Product. — It sometimes happens 
that a small proprietor who manages his own business 
receives the entire product, — rent, wages, interest, and 
profits. As, for example, a small farmer who owns his 
farm receives rent on account of fertility and location, 
wages on account of his own labor, interest on account of 
the capital he has invested, and profits on account of his 
skill in managing his affairs. Yet in economic analysis 
all of these divisions are clearly discerned, for rent arises 
out of land whether a man works his own land or that of 
another. 

169. Law of Equal Returns. — In determining these 
divisions of the net product there are certain laws which 
may be observed, although in practice, owing to certain 
interferences, they show nothing more than tendencies. 
Indeed, a large number of economic laws, when put to 
final test, show nothing more than general tendencies ; yet 
these general tendencies are important for considera- 
tion. Let us suppose that we have free competition among 
all industrial people, and that we have likewise perfect 
mobility of capital and labor so that they will go wherever 
needed, and that there is sufficient land to be called into 
operation when it is needed. Add to these conditions one 
other ; namely, that each knows what other business men 
are doing or about to do; then we shall find that the last 
increment of capital or labor or skill will receive the same 
remuneration as the preceding increment of each most 
recently employed in any way. That is, a dollar, or a 
day's labor, or a day's managing service, will yield in each 

192 



PRINCIPLES OF DISTRIBUTION 

case as much in one business as it would in another, and 
will be determined by the remuneration of services in the 
last investment. Now, this arises out of the fact that these 
various factors of production which are enumerated will 
seek the largest possible return of wealth for a given sacri- 
fice. For it is easy to see that, under the conditions men- 
tioned above, labor will tend to go where it will obtain the 
highest reward, and, if perfectly mobile, the equilibrium 
of demand and supply will be established and wages in 
the same employment will be the same the world over. 
The same is true for capital. For if men understand 
that other businesses are more remunerative, and if capital 
moves freely, it will seek the highest rewards, but in its 
attempt to do this the equilibrium of supply and demand 
will again be established. 

Now, it is well known that capital, labor, and managing 
ability are not perfectly mobile, and it is also well known 
that each man does not know what all other business men 
are doing or are about to do. But there is a constant ten- 
dency to realize this principle; that is, there is a tendency 
in interest on capital to become the same no matter where 
it is invested, for wages to reap a certain average rate, 
and for rent to become more constant from year to year. 
The interference of monopoly and government destroys 
the mobility of capital and labor, and thus modifies the 
action of the laws of distribution in relation to them. 
Yet, upon the whole, equal returns to last investments 
appear to be more and more constant. 

170. Dynamic Law of Distribution. — It has already 
been stated that the divisions of the net product into wages, 
rent, profit, and interest, if taken at any given instant, will 
_ ■ o 193 



ECONOMICS FOR HIGH SCHOOLS 

represent a more or less constant return to each, but if 
industrial processes are set in motion, the relations are liable 
to change from time to time. Thus, the amount of labor, 
land, or capital in the market at any given time varies, 
and hence yields a variable amount to wages, rent, and 
interest, respectively. Considering productive enterprise 
in motion, land, labor, capital, and managing ability will 
tend to be remunerative inversely in proportion to their 
increase; that is, the one that has the smallest relative 
quantity in the market reaps the greatest reward at the 
expense of others. In other words, if labor and capital re- 
main the same in quantity, and a large amount of land be 
suddenly thrown upon the market, rent will have a tendency 
to be low while labor and capital are called into use, and 
will reap a relatively larger income in proportion to serv- 
ices. Or, if land and capital remain constant in quan- 
tity, and a large amount of labor be thrown suddenly 
upon the market, wages will tend to fall, and rent and 
capital increase in proportion. Thus, if capital is doubling 
itself in forty years and labor in twenty, land remaining 
constant, wages will be lowered and interest raised. It 
is in this way that a sudden increase in the laboring popu- 
lation tends to lower wages, or the taking up of a large area 
of agricultural land suddenly lowers rent. 

Nevertheless, under normal conditions of industry, the 
law of supply and demand is brought into operation and 
the equilibrium of distribution appears. Thus, if a large 
amount of labor is thrown into the market, it seeks employ- 
ment, and if capital is available, it employs labor. If land 
is available, it is also called into use, so that they stand 
relatively in the same position as before. This law mani- 

104 



PRINCIPLES OF DISTRIBUTION 

fests itself, then, largely in the irregularity of social develop- 
ment, which is soon overcome by the reestablishment of 
normal relations. 

171. How the Gross Product is Distributed. — By gross 
product is meant the entire amount earned in a given in- 
dustry, or, if considered in the concrete, of a given plant of 
said industry. It represents the entire earning capacity 
of an industry as evident from its annual output before 
expense of running has been deducted or economic distri- 
bution has taken place. 

In considering a specific business, the gross profits are 
divided into: replacement, which means making good the 
loss of capital which has been invested in any given busi- 
ness; interest, which must be paid for the use of capital 
to the man who loans it; insurance, or a certain sum set 
apart, taken from gross profits, to cover past or future losses, 
because the revenue varies from year to year ; the wages 
of superintendence or management which generally appear 
in the form of salary; and finally, the fifth element called 
pure profit. This accrues to the manager on account of 
superior wisdom in the management of business. This 
represents the analysis of a single business from the stand- 
point of a business operator. 

It is clear from the foregoing that the amount of profits 
which each factor receives is not immediately dependent 
upon the proportional amount each corresponding factor 
in production supplies in the process of creating wealth, 
hence we must find some other determining cause. One 
school of economists has held that nature, labor, and capital 
are the three sources of value, and from each one there 
flows a stream of value coming from its respective source; 

195 



ECONOMICS FOR HIGH SCHOOLS 



that the amount and volume of this stream is dependent 
upon the power of land, labor, and capital in production. 



DIAGRAM A. 
PROPORTIONAL DIVISION. 






DIAGRAM B. 
VALUE. 



Variable proportions 



variable products. 




DIAGRAM C. 




V/ages 




(See diagram A.) It is held that there are three distinct 
streams flowing from source to mouth, that just the pro- 
portional amount of value as has flowed from each source 
passes into the income of the persons who own the soil, the 
capital, or furnish the labor; that the force of the stream of 
value is dependent immediately upon the force of the stream 
of productive power; and that each source thus represents 

196 



PRINCIPLES OF DISTRIBUTION 

a distinct productive power, with a distinct quantity of 
economic goods, each having definite value. This, of 
course, makes distribution a question of production, which 
is scarcely true. 

If we were to carry out the figure it might be said that 
the truth lies in the fact that the three separate streams of 
production spread out again into distinct branches in their 
value-creating power. (See diagram B.) That is, the 
stream comes under the influences of the causes which 
create value; namely, the demand for goods, which in- 
cludes the ability and the willingness of men to take eco- 
nomic goods at a certain market value. The value-creating 
power in production depends upon the intensity of men's 
needs and the quantity of means which they have for sup- 
plying these wants. That is, the amount of income flowing 
into these three separate categories will depend, not upon 
the several amounts of powers of production, but what has 
been separated out from the three streams in the figure by 
the value-creating power of man; that is, we refer it again 
to the law of supply and demand and market valuation. 

Another group of economists assume that labor is en- 
titled to the entire product because it is the source of value, 
and that labor would receive this product if it were not for 
a band of robber landlords, capitalists, and managers 
who suddenly appear to divide the returns of labor among 
themselves. This argument cannot be maintained, be- 
cause labor is not the only cause of value ; nor would it be 
true that after rent and interest had been separated out, 
wages would take what was left, — for indeed there is no 
residual claimant, either in rent, interest, wages, or profits. 
(See diagram C.) 

197 



ECONOMICS FOR HIGH SCHOOLS 

If wages be considered, first, what is the wage-earner's 
share of this varying proportion ? It will be determined by 
the value-creating power as estimated by the market valua- 
tion of goods, which is determined by the law of supply 
and demand in combination with capital and land. If 
there is no limit to the supply of laborers, while the total 
amount of wages received may be greater than the total 
amount of capital in any given production, the former will 
be out of proportion to the total number of laborers em- 
ployed, and the laborers themselves competing with each 
other for this total amount may reduce wages, on account 
of the law of diminishing returns, down to the minimum 
of living. That is, the individual laborer must depend 
primarily upon the valuation placed upon the products 
of his labor in combination with other forces, and second- 
arily upon competition with his fellows for his share in 
the total product. Nevertheless, in normal conditions of 
business the rate of wages tends to remain somewhat con- 
stant, or to improve with improving business and decline 
with declining business. We can account for this in no 
other way than from the fact that the presence of a large 
number of able-bodied men seeking employment, other 
things being equal, will bring into operation a larger amount 
of available land and induce a larger amount of capital 
to seek investment, all of which will require a larger amount 
of managing ability. Therefore there is a tendency for 
not only the total amount of wages under normal condi- 
tions to remain about the same, but the rate of wages 
among laborers of the same grade to remain more or less 
constant. Especially is this true when we consider that 
of any staple commodity in the market, the market price, 

198 



PRINCIPLES OF DISTRIBUTION 

though not caused by the cost of production, has a tendency 
to approximate to this finally.^ 

Suppose, now, that the entire product in a given business 
be one thousand, and that ten units of land yield eighty 
units of rent, ten units of capital yield one hundred 
sixty units of interest, ten units of organizing power yield 
one hundred sixty units of profits, and ten units of 
labor yield six hundred units of wages. It is evident that 
the average wages received by one unit of labor would be 
sixty. If the population under normal conditions should 
steadily increase until it was doubled, we might assume 
that the product would be doubled, and we should get 
two thousand instead of one thousand; that twenty units 
of land would yield one hundred sixty units of interest; 
twenty units of capital, three hundred twenty units of 
interest; twenty units of organizing power, three hundred 
twenty units of profits; while twenty units of labor would 
yield just double what they did before, or twelve hundred 
units of wages, the average wages of each normal unit 
remaining sixty, and so for each other factor in production. 
If, on the contrary, we would have a sudden influx of a 
lower grade of labor, the product would not be doubled 
under other similar conditions. Suppose, now, that the 
product amount to only eighteen hundred instead of two 
thousand. In this case, fifteen units of land would yield 
one hundred thirty-five units of rent ; fifteen units of capital 
would yield two hundred seventy units of interest; fifteen 
units of organizing power, two hundred seventy units of 
profits. The total to wages then would be the difference 
between the sum of these and eighteen hundred, or eleven 

^ See Thompson, " Theory of Wages." 
199 



ECONOMICS FOR HIGH SCHOOLS 

hundred twenty-five. But the labor having been doubled, 
namely, twenty units, the yield here of wages is only fifty- 
six and one fourth to each unit of labor. While the entire 
amount of wages by the influx of cheap labor has been in- 
creased, the rate to each individual has been diminished. 
It might likewise be shown that land, capital, and organiz- 
ing power receive a diminishing product per unit through 
the introduction of a large amount of unskilled labor. 

This harmonizes the two apparently opposing theories 
respecting wages, and makes them complements of each 
other, (i) That wages of all laborers in similar employ- 
ments are determined by what the laborer can produce 
who works on the margin of cultivation or the margin 
of utilization. Here the laborer receives as wages the 
total product, and if other laborers receive more than he, 
he would leave the margin to compete with them and 
the margin would rise. Hence the equalizing tendency 
of wages brings them all down to the marginal laborer 
who works upon the poorest opportunities. 

(2) The other view asserts that wages are determined 
by the standard of life of the laborer. The general rate 
of wages in any country, class, or industry is the standard 
of living of the most expensive families furnishing a nee- 1 
essary part of the supply of labor in that country, class, 
or industry. The first is the objective law of wages, the| 
second is the subjective. 

Both of these laws are subservient to the law of supply | 
and demand, and the value-creating power of the pro- 
ductive process. The larger the supply, the lower wiUj 
be the marginal product compared with the labor pro- 
ducing it. Hence, whatever controls the supply of labor] 



PRINCIPLES OF DISTRIBUTION 

controls the marginal value of its product, which deter- 
mines the general rate of wages/ 

It is held by some in this connection that the manager 
of business, the entrepreneur, is the residual claimant, 
and that the large products of industry are absorbed in 
profits. But it will be found under free competition 
that profits are governed as specifically by law as interest, 
rent, or wages. As related above, the gross profits of 
any business are made up of what we term the replace- 
ment of capital, the insurance, interest, wages of super- 
intendence, and what we may call pure profits. Pure 
profits are the only kind which should be classified along 
with pure wages, economic rent, or economic interest. 
Mr. Walker attempted to show that the profits received 
by different employers in the same enterprise vary accord- 
ing to the law of rent, and that there are certain indus- 
tries that, having paid interest, wages of superintendence, 
insurance, and replaced the principal, — the capital, — 
there was nothing left for the entrepreneur ; and for this 
lowest class of industries there was a constant gradation 
to the highest, which paid a large return of net profits 
on account of superior position or management. That 
there are certain industries that pay no net profits, every 
one knows; that there are others in the same line that 
pay small net profits, is evident; while there are still 
others that pay a large return in profits. It is also evident 
that unless a manager of any business can pay the expenses 
of that business he will not continue in it, except it be 
through a short period of hard times in order to tide over 
business to better times, or to keep from losses. But 

* See chapter on Wages. 



ECONOMICS FOR HIGH SCHOOLS 

under free competition the total amount of profits going 
to the entrepreneur or manager in any given line of indus- 
trial operation will depend again upon the demand and 
supply, or the subjective valuation of the goods produced, 
by the consumers of those goods; and, secondarily, upon 
the competition of the number of entrepreneurs or man- 
agers seeking investment in any given line. But there 
are so many disturbing elements which modify profits 
that it has the appearance of being less steady than any 
other return in business. Thus, in case of a drought or 
a failure in business, wages, rent, or interest, is each 
steadier than profits. 

172. Rights of Property. — The theory of the rights of 
property is frequently discussed by economists, and it 
has its place here in distribution, for it has a great influ- 
ence in this part of economic life. Some economists 
have held that the right to hold property is based upon 
labor. According to their ideas, the man should be the 
owner of the things created by his own exertion. If this 
theory is put into practice, it leads to absolute confusion, 
for when a man possesses a house, a forest, or a farm, 
it may not have been his own labor that created any one 
of these; nor in the goods that fill a store do we find any 
evidence of the creative power of the owner. From a 
legal consideration the origin of the right of property is 
not discussed very fully. Lawyers have taken the right 
of property as a fact, and the rights of property are secured 
only through the power of the state. To define property 
by its attributes, accepting it as a fact, is the extent of 
the legal conception. Certain persons have advanced the 
theory of natural rights, holding that property is merely 



PRINCIPLES OF DISTRIBUTION 

an extension of human personality over external nature. 
This is a very imperfect conception, for it leads to the 
assumption that all people are property owners. The 
occupation theory ascribed property rights to the one 
who first obtained possession and whose property was 
finally recognized by his associates. Doubtless this is 
the atomic theory of the origin of property, though it 
has been much extended. The individual and collective 
ownership of property in the early period points to the idea 
of occupation as the first recognized title. It is evident 
that there is some truth in each one of these theories, but 
that the real test is in the property rights as evidenced 
in the Roman law and the French civil code, and as such 
is recognized in all modern civil and common law. 

Economic distribution is modified by the rights of 
property. Certain property is rapidly consumed, and 
the influence of ownership is very light; other property 
lasts a long time: indeed land itself lasts forever, which 
makes a vast difference in distribution. Other forms of 
wealth or property, such as government stocks or bonds, 
last as long as governments themselves. These highly 
perpetual classes of goods descend by will or inheritance 
from one person to another, and the distribution of wealth 
is thus very much affected. There are persons who are 
scarcely capable of earning a respectable living single- 
handed, yet they inherit fortune from a distant relative; 
the result is a distribution of wealth, and a net product 
of industry soon begins to flow through rent or interest. 
To avoid this principle of distribution by means of in- 
heritance, the socialist sought to dispose entirely of inherit- 
ance; that is, to abolish it. People who complain bitterly 

203 



ECONOMICS FOR HIGH SCHOOLS 

about inequalities of economic distribution are opposed 
to inheritance, for it tends to perpetuate and aggravate 
these inequalities. 

The exercise of the rights of property may be by a pri- 
vate person or individual, or, through the operation of 
the law, by a group of individuals in corporate capacity. 
The rights of property as exercised by corporations vary 
somewhat from the rights of property of individuals, for 
in all corporations we find that the majority rule; while 
the members associate themselves in a group under con- 
tract to carry out different kinds of work, they also 
agree to submit to whatever policy is adopted by the 
majority or the policy of the states making the cor- 
porate laws. Also, the extension of powers granted 
these corporations by the states gives them superior 
rights, such as the right of eminent domain and the in- 
come arising therefrom. The ownership of public prop- 
erty is manifest through what are known as political 
corporations, the general policy of the state being to man- 
age the property for the people at large. Here, then, we 
have a variety of ownership which has grown up through 
custom, and its authority and right need not be questioned. 
The only facts to be observed are, as to whether there is 
a definite description of the property, and whether a legal 
title can be shown to give to it all the rights and privileges 
of ownership. The right of property cannot be rationally 
questioned, although many people who attempt to carry 
out their socialistic theory and deny the right of interest 
in order to maintain their position are forced to deny 
the right of property in their attempt to defend their 
absurd position. 

204 



PRINCIPLES OF DISTRIBUTION 

173. Monopoly Privileges. — There are, however, cer- 
tain monopoly privileges granted by the state, which also 
interfere very much with the distribution of wealth. These 
are generally in the form of patent rights, copyrights, 
trade-marks, and franchises. They are sometimes called 
artificial monopolies, because they are created by the 
state. They are not a source of wealth or a means of 
production, but merely an exclusive control given by the 
government over certain enterprises, the entire profits of 
which may be directed into the hands of one who owns 
the right or privilege. But as these may be bought and 
sold, from the personal standpoint of the distribution 
of wealth they are property rights. 

There is another group of monopoHes, that arise out 
of the condition of modern industrial society. These 
are sometimes called natural monopolies, because the 
monopoly power arises out of economic conditions; 
although the line of division is not strongly marked be- 
tween them and artificial monopolies, for indeed every 
natural monopoly receives the sanction of the govern- 
ment by the means of a franchise which makes it rely 
in part upon the state for its existence. Land, in so far 
as it is a monopoly, belongs to this class, and such great 
enterprises as railways, waterworks, tramways, gas 
works, telegraphs, etc., are classified in this group. Also, 
the modem manufacturing industries which have grown 
into gigantic corporations and trusts have derived such 
a momentum of power and mastery over conditions as 
to be practically monopolies. In all monopolies the 
power to limit the supply of products on account of the 
absence of competition gives an exclusive privilege to a 

205 



ECONOMICS FOR HIGH SCHOOLS 

few which is frequently of great value. Because of their 
power to fix prices, control the market, or limit the field 
of enterprise, monopolies interfere with the normal course 
of distribution. 

References. — Carver, T. N., " The Distribution of Wealth"; 
Clark, J. B., " The Distribution of Wealth"; Commons, J. R., 
" The Distribution of Wealth" ; Hobson, John A., " The Economics 
of Distribution." 



206 



CHAPTER XVIII 

RENT AS A FACTOR IN DISTRIBUTION 

174. Rent in General. — Rent is called the normal 
return of land. Ricardo asserted that it arose from the 
natural and indestructible qualities of the soil; and this 
definition is fundamentally correct, for rent arises from 
the use of the ground alone. As Ely says, "The rent of 
land is the annual return of land itself"; or, as Walker 
says, " Rent is the surplus of the crop above the cost of 
cultivation on the least productive lands contributing 
to the supply of the market." Marshall says, "The 
rent of a piece of land is the excess of its produce over 
the produce of an adjacent piece of land which is culti- 
vated with an equal amount of capital, and which would 
not be cultivated at all if rent were demanded for it." 
And Marshall continues to say that " the economic rent 
of a piece of land is found by subtracting from the value 
of the annual produce an amount sufficient to return 
the former outlay with profits." These are only different 
methods of expressing the nature of rent. Andrews 
extends the principle of rent to general monopoly, and 
says, " Rent in its broadest sense is any kind of gain 
arising from monopoly, whether in land, capital, or tal- 
ent income, which falls to any productive agency simply 
because of its rarity." 

175. Contract Rent and Economic Rent. — It is nec- 
essary to distinguish between ordinary contract or market 

207 



ECONOMICS FOR HIGH SCHOOLS 

rent and economic rent. A person enters into a contract 
to pay the owner of land a certain fixed annual sum for 
the use of the land. For this sum the tenant has the use 
of the land, buildings, ground on which they stand, and 
all improvements. The sum which he pays is composed 
of two chief elements, — one the payment for the use 
of capital invested in improvements, and the other for 
the use of land itself. A piece of unimproved prop- 
erty adjoining, of the same grade as the improved land, 
rents for much less, which is probably the normal rent. 
However, it may be possible that in making the con- 
tract — on account of ignorance, or a sudden excessive 
demand for land, or the pressure of custom in charging 
high rents — the individual may have paid too much, 
or more than the real rent of the land alone, known as 
economic rent in the principal works of political economy. 

A very good illustration of this economic rent is seen 
in cities such as Baltimore and Philadelphia, where the 
rent of the land is different from the rent of the house 
which stands on it. A person may own the house but 
not own the land, and thus pay rent for the land on which 
his house stands, — which would be considered as eco- 
nomic rent. 

176. Cause of Rent. — Rent arises from two funda- 
mental conditions of land: first, that of fertility; and 
second, that of position or location. These two usually 
work in conjunction, and the difference of position more 
frequently than the difference of fertility represents the 
chief factor in determining rent in towns and cities; while 
in rural districts fertility of soil is a more important factor. 
In case of ground rents of town lots, fertility does not 

208 



RENT AS A FACTOR IN DISTRIBUTION 

enter into the cause of rent, it being determined by posi- 
tion alone. Lands that are favorably located yield a 
larger return than those less favorably situated, and lands 
having a fertile soil which yields a large product have 
a higher rent than poorer land. As the first use of the 
soil is tillage, it would appear that the difference in fer- 
tility would be the first cause; but as location respecting 
the market lessens cost of transportation, the position of 
farm lands has much to do with their market rent. In 
determining rent, Walker insists on the consideration of 
fertility as its real cause. 

177. Manner in which Rent Arises. — Suppose there 
are several tracts of land in the same market, and that 
there is private ownership of land and competition in its 
use. Eliminate all personal influences save the desire to 
obtain the largest return for a given sacrifice of capital 
and labor on the part of both landlord and tenant. Of 
the tracts of land A, B, C, and D, which are enumerated 
in the order of their fertility, D yields just enough product 
to pay for the cost of cultivation, including the wages of 
labor, interest on. capital invested, and remuneration 
for managing ability. Let us fix this yield at ten bushels 
per acre. It costs no more to cultivate the tract C of more 
fertile soil than the tract D, hence the expenses per acre 
will be the same. Suppose, now, that C yields fifteen 
bushels per acre, it is evident that the five bushels repre- 
sent a clear gain on account of extra fertility. So, if 
B yields twenty and A twenty-five, it is evident that the 
rent is respectively ten and fifteen bushels per acre. Should 
the prices of products rise so as to make an increased 
demand, then other and less fertile lands than D may 
p 209 



ECONOMICS FOR HIGH SCHOOLS 

be brought into use to supply the market, and rent will 
appear in the tract i:>, for it will take fewer bushels to 
pay the cost of cultivation. On the contrary, if prices 
should fall to any great extent, C will no longer pay rent, 
but go out of cultivation unless it can be used for some 
other purpose to sufficient advantage to pay rent or cost 
of service. (See diagram D, Fig. i.) 





. Fig, 


1. 




25 bu. 


20 bu. 


15bu. 


lObu. 


A 


B 


C 


D 


Rent, 15 bu. 


Rent, 10 bu. 


Rent, 5bu. 





Fig. 2. 




Fig. 3. 



RENT AS A FACTOR IN DISTRIBUTION 

178. Difference in the Fertility of Soil. — As rent 
rises chiefly from the difference of the fertility of soil, it 
is evident wherever land is in cultivation. Thus, suppose 
a farmer has a tract of four hundred acres of land which 
is divided into four different tracts of unequal fertility 
(Fig. 3). The most fertile lands represented In Tract i 
are cultivated first. If the returns from agriculture are 
sufficient, the lands In the second grade of fertility in 
Tract 2 will be cultivated; and if prices continue to rise, 
the farmer may continue to Increase the area of cultiva- 
tion until the entire tract is cultivated. Here, as above, 
rent rises in the first instance out of the differences of 
fertility of the land. 

179. Favorable Location. — But if land were all of 
the same degree of fertility. Its difference in location 
would have a tendency to develop rent. Now it is Impos- 
sible to equalize the location of land, whether it be agri- 
cultural land or city property, for the desirability of loca- 
tion will always be observed, even in the taking up of new 
lands in a large valley. Usually, the first located has a 
value superior to the second, not only on account of fer- 
tility, but also of location. The ground rent which arises 
in cities is entirely dependent upon location. On some 
streets we find rent reaching fabulous prices, while on 
others it is much lower. The farther business property 
is located from the busy center of the city, the cheaper 
the rent, unless It should be taken from valuable residence 
property; and residence property varies in value likewise 
as It recedes from the desirable and fashionable residence 
localities. 

180. Limited Returns to Agriculture. — Intensive agri- 



ECONOMICS FOR HIGH SCHOOLS 

culture tends to retard the process of taking up new lands, 
and were it not for the fact that land has not only decreas- 
ing but limited returns, a small area would tend to supply 
all the demand for agricultural products; but there is a 
limit to which agriculture can be successfully continued on 
any tract of land. Indeed, there is a point to be reached 
when the application of labor and capital will yield no 
return whatever. The tendency to take up new lands does 
not always proceed with regularity. In the first place, 
lands are not taken up always on account of their immediate 
economic yield, but rather are secured as an investment. 
Men enter a new territory far from the market and take up 
lands which would not yield any rent at all or even pay for 
the cultivation, obtaining only a bare subsistence while 
cultivation is carried on, with a prospect in the rise of the 
price of land somewhat later. This is purely a business 
investment, and nearly all the lands of the western part 
of the United States have been secured in this way. It is 
also true that when people have once established themselves 
on lands they do not abandon them for more fertile lands, 
because they have invested capital in improvements and 
they hold these lands even after they pay no rent. 

i8i. Margin of Cultivation. — That land which will 
just pay the cost of cultivation and no more is said to be 
on the margin of cultivation. (See diagram D.) Lands 
that are less fertile or less favorably situated are said to be 
below the margin of cultivation, and will not be occupied. 
That is, land that will pay wages for cultivation, profits 
for management, and interest on capital invested, will be 
occupied and cultivated, while land that fails to yield this 
return will not be cultivated. It sometimes happens, how- 



RENT AS A FACTOR IN DISTRIBUTION 

ever, that land which will not be used for agricultural pur- 
poses may be used for other purposes, and thus yield a rent, 
or at least pay for the cost of cultivation. It also happens 
that land is occupied and cultivated by persons who spend 
part of their time upon it, using the remainder for some 
other purpose. In such cases, land that would pay no rent 
by cultivation might yield a return for pasturage. 

182. Prices and Rent. — An increase in prices, if per- 
manent and constant, will tend to enlarge the agricultural 
area; and this has a tendency to increase rent, for, as it 
costs the same to cultivate an acre of poor land as that of 
rich land, the lower the margin of cultivation falls, the higher 
will be the rent, because the annual return on the fertile 
lands is much increased, and the difference in the cost of 
cultivating the poorest land occupied and the returns of 
the most fertile is greatly increased. Consequently, high 
prices as well as favorable location increase rent, simply 
because high prices create a demand for land. The oppo- 
site is true in the case of fall of prices. A long, persistent 
fall in prices will tend to diminish the demand for land, 
which will cause its rent to fall. This must be taken as a 
general law which is interfered with by various conditions 
of investment, for land will be held for year after year when 
local interferences cause it to yield no rent or indeed to fall 
below the margin of cultivation, simply on account of a 
prospective yield. In this way business is tided over in 
difficult times until it pays. This, however, does not inter- 
fere with the law of rent, for indeed were there no margin 
of cultivation except in theory, the fact of the relative fer- 
tility of land and the difference in the desirability of loca- 
tion would be sufficient to establish the law of rent. 

213 



ECONOMICS FOR HIGH SCHOOLS 

183. Rent does not enter into the Cost of Production. — 

It is assumed that the market price of an article is not 
dependent upon the rent that is paid, but rather that rent 
is determined by the market price. This is logically the 
correct view to take. High rents do not give us high prices, 
but high prices high rents. It might be well to inquire 
carefully into the real nature of this statement to see what 
is meant. When Mr. Ricardo enunciated this doctrine, he 
talked about corn as if all kinds of produce whatsoever had 
been reduced to one kind. If this could be true, it would 
be actually certain that high prices would give us high rent 
universally, and that high rents have nothing to do with high 
prices. However, there is an indirect way in which high 
rents may make high prices. To find out just what is 
meant by this principle, in a practical sense, let us take an 
example of mineral springs. (See Marshall's " Principles 
of Economics," Bk. VI., ch. 2.) Let us suppose of a series 
of mineral springs that they are all owned by different 
individuals; that they furnish a natural mineral water 
which finds a market, and for which there is no available 
substitute. There is a free competition in both buying and 
selling. Suppose that the supply that is drawn from each 
of them can be increased indefinitely by pumping, but that 
the expense of this increases in proportion to the additional 
supplies to be obtained by this process. The owner of each 
spring will go on increasing his production until the price 
of water no longer covers more than the expense of an 
additional supply. That is, the last gallon of water which 
the expenditure enables him to raise when the amount raised 
by the whole number of springs is just suflicient to meet 
the market will be produced at an equilibrium price which 

214 



RENT AS A FACTOR IN DISTRIBUTION 

will just pay for its own production. The rental value of 
each spring now will be the excess which this price affords 
over the expenses of working it. That is, demand and sup- 
ply here, as before, regulate the price, but will not enter 
into the expenses of production. But suppose, now, that 
the land occupied by one of these springs is more desirable 
for a building site, and some person should build upon it, 
and thus decrease the supply of water. Immediately, as 
the water supply is contracted, the demand for the water 
is relatively greater than the supply, and the price rises. 
Consequently, the high rent of the ground used for some 
other purpose increases the price of the commodity in the 
market. With reference to agricultural products taken as 
a whole, the law that rent does not enter into the cost of 
production obtains. But, if there be a certain amount of 
land which can be used for the purpose of raising wheat 
and a certain amount that can be used for corn, suppose an 
increased demand for corn should raise the price of that 
commodity so that it would encroach upon the wheat land, 
taking a part of it; immediately now, supposing the de- 
mand for wheat be constant, the demand will be greater 
than the supply, and the price will rise on account of the 
excessive rent arising from the corn land, which has there- 
fore encroached upon the wheat land. 

184. Rent and Free Land. — The principles of rent as 
enunciated above represent the result of free land. So long 
as there are lands to be taken up, the principle of rent is 
easily determined. There must be a time, however, when 
all of the free land will be taken which, under any ordinary 
circumstances, can be used at all. As the margin of cul- 
tivation falls under free lands, rent absorbs more and more 

215 



ECONOMICS FOR HIGH SCHOOLS 

of the entire product ; and as the rent increases, the margin 
of free productivity continues to decrease, because lands 
of lower grade can be used. When landlordism prevails, 
and the owner of the land fails to cultivate, but lets it out to 
tenants, the land will yield no rent in the lowest scale of 
production. There is a continual absorption of the entire 
product until rent meets wages, and then there is a check. 
The rent of land arises whether land is free or unfree; 
there is no difference in this respect so far as the principle 
of rent is concerned. 

185. Economic Significance of Rent. — Rent must 
always be allowed for in any financial calculation what- 
ever. The constant increase in rent in proportion to the 
returns from agriculture has alarmed some people, who 
seem to believe that rent eventually will absorb the entire 
product. Fortunately, in our own country, sixty-five per 
cent of the farms are still owned by those who work them, 
and whatever increment of rent arises goes to the owner. 

References. — Walker, F. A., " Land and Its Rent " ; Commons, 
J. R., "The Distribution of Wealth"; Ricardo, D., "Principles of| 
Political Economy"; Patten, Simon N., "The Premises of Political 
Economy." 



216 



CHAPTER XIX 

WAGES AS A FACTOR IN DISTRIBUTION 

i86. Labor the Cause of Wages. — When we speak of 
wages in the scientific sense, we mean the earnings of com- 
mon labor; all high fees and salaries should be excluded. 
The rewards earned by peculiar talents, education, or train- 
ing are sometimes classified along with profits. How- 
ever, the line must not be drawn too closely when we con- 
sider the general subject of wages, for in a general sense 
it is payment for services rendered. The salary of a rail- 
road president at $25,000 a year is a return for services. 
But the wages question scientifically considered should not 
include such a salary as wages. But labor is the cause of 
wages. The payment for the services rendered by the com- 
bined action of body and brains is wages. It is earned 
by the laborer. He earns his own wages each day he labors, 
and when he ceases to do this, he is not employed. Hence 
it is sometimes said that the laborer pays his own wages. 
The return to common labor is called pure wages, which 
should be distinguished from gross wages, which might 
include extra rewards and services. 

187. Real and Nominal Wages. — Economic wages are 
real wages, not nominal. By real wages is meant the pur- 
chasing power of a day's labor; by nominal wages the 
amount received in currency. A man may be receiving 

217 



ECONOMICS FOR HIGH SCHOOLS 

$2 a day inVone country and for the same service a man 
receives $i in another, yet they may have the same real 
wages; for it ife possible that the man who receives $i a day 
buys the same^-rticles for $i that would cost the other man 
$2. The real ivages in different countries do not vary so 
much as the nominal wages, hence people in making 
comparisons of wages frequently omit to properly distin- 
guish between real and nominal wages. 

1 88. Wage-fund Theory. — Some of the older econo- 
mists held that there was a certain sum, a part of capital, 
set aside for the payment of wages, and when this sum was 
exhausted, no more laborers could be hired until it was re- 
placed. This wage fund was continually growing as eco- 
nomic society and wealth accumulated, and the number of 
laborers that might be employed was limited by this fund. 
Accepting this theory, it was an easy matter to determine 
the rate of wages by simply dividing the amount of the wage 
fund by the number of laborers. This method would set 
a limit upon the rate of wages to be paid. Mr. Mill advo- 
cated this doctrine in his earlier years, but abandoned it 
somewhat later. The fact is, that the source of wages is the 
earnings of the wage-earner, and wages come out of the 
product which he makes every day. Instead of giving 
him his share of the product at night or at the close of the 
week, the employer advances in the form of money the 
laborer's wages each day or each week. Of course in the 
wages system the rate is determined by the employer and 
laborer by contract before the labor begins. But when 
the laborer's earnings will no longer pay for his wages, he 
will cease to be employed. There is a point at which the 
wage-fund theory and the labor theory practically coincide, 

2l8 



WAGES AS A FACTOR IN DISTRIBUTION 

for wages are limited by capital. The amount of capital 
seeking investment by way of buildings, machinery, etc., 
determines the number of laborers to be employed, and 
hence fixes the rate of wages. If capital is not available, 
laborers will not be employed. On the other hand, if 
laborers are thrown on the market, they will tend to decrease 
wages by competition, and the capital employed under such 
circumstances indirectly determines the rate. Now, the 
wage-fund theory supposes that a certain sum is set apart 
for the payment of wages, and that no more laborers can 
be employed until this is replaced. If we consider this 
replacement working at a rapid rate, it simply asserts that 
capital limits wages. However, there is a wide 'distinc- 
tion in theory, for, in the economic sense, wages must come 
out of the earnings of labor instead of being paid out of the 
surplus of capital, which is used for other purposes. The 
point of view is entirely different, and the different results 
are of great importance in the theory of wages. 

189. Determination of the Rate of Wages. — There are 
various theories of wages. Some workmen and certain 
philosophers are always demanding the whole of the prod- 
uct for the laborer. They hold that the men who create 
the goods have the use of them. They imagine that gains 
are obtained by capital in an unjust way, but are in error 
because they fail to recognize that capital performs any 
service whatever. Those laborers who attempt to break 
down the wage system by methods of cooperation are the 
first to learn that capital is necessary to carry on any 
business whatever. Generally speaking, the rate of wages 
is determined by supply and demand. The more laborers 
in the market, the demand remaining the same, the lower 

219 



ECONOMICS FOR HIGH SCHOOLS 

will wages be. This is the general theory underlying the 
whole system of wages, although it is true that wages may 
be reduced to a more specific theory, which will be deter- 
mined hereafter. 

190. Residual-claimant Theory. — One of the common- 
est theories for determining the rate of wages is generally 
known as the residual-claimant theory. It has been ad- 
vocated by Professor Walker and other able economists. 
It holds that the net product of industry divides itself into 
rent, profits, wages, and interest ; that when rent, profits, 
and interest are satisfied, wages take what is left. When 
asked why, if this is true, the amount of wages is so small, 
it is replied that by some power of capital or managing 
ability a large proportion of income has been directed away 
from its natural source which would otherwise have fallen 
naturally to labor. In reality there is no residual claim- 
ant in distribution. Wages are a variable proportion of a 
variable product, and so for rent and interest, — both being 
variable proportions of variable products. While the net 
product is distributed between rent, wages, interest, and 
profits, the proportion upon which it is divided does not 
depend upon the residual- claimant theory, but rather upon 
the value-creating power of each factor in production, 
and this throws it all in the province of supply and 
demand. 

191. Iron Law of Wages. — In attempting to ascertain 
whether there is a natural law of wages, Turgot announced 
that " in every kind of labor the workman's wages must 
fall to a level solely determined by the necessities of exist- 
ence." J. B. Say and Ricardo somewhat later use al- 
most the same words; and the socialists, taking up the 



\ 



WAGES AS A FACTOR IN DISTRIBUTION 

idea, expanded and emphasized it. This is what is known 
as the iron law of wages, or, as it is sometimes called, the 
brass law. It means that wages must be regulated by the 
income that is absolutely necessary for the support of the 
laborer and his family. There must be sufficient to give 
food, shelter, and protection; to keep up repairs, so to 
speak; and to replace the laborer with another when he 
wears out. This means that the Chinaman living upon 
rice and with small amount of clothing and little protection 
receives wages accordingly, and that the American laborer 
who reduces his style of life to the same condition must like- 
wise live upon a few cents a day. The law as a law is not 
true, though it does show a tendency in determining the 
rate of wages. If we take it that the workman's wages will 
never rise above what he absolutely requires to live upon, 
the facts in the case overthrow it. For different kinds of 
work receive different wages ; also, different wages for the 
same work are paid in different countries. But, says one, 
this rate of living is taken according to the standard of life 
that it is necessary for him to maintain. If this be true, 
then the iron law of wages is not such a terrible thing as it 
appears to be. If it means that laborers are ground down 
to the bare necessaries of human existence, and that the 
normal rate of wages is just sufficient to sustain life and re- 
produce their kind under the most favorable circumstances, 
the law is not true. But in a broad sense the theory 
is more or less true, for wages must sustain life, or work 
ceases. On the other hand, there is a point beyond which 
wages cannot rise without discouraging business operations. 
Between these two points, the upper and the lower, are 
developed the real scientific laws of wages. 



ECONOMICS FOR HIGH SCHOOLS 

192. Scientific Law of Wages. — If we consider the 
various industries in every line of work, it will be seen that 
the natural or normal rate of wages is determined by the 
lowest grade of industry in any given line. As it has been 
stated, " general wages tend to equal the last actual prod- 
uct by the last laborer that is added to the social working 
force." This is established on the principle that when 
labor will pay for itself, it will be employed ; if not, no labor 
will be employed. In this respect it has a resemblance to 
the law of rent and profits. It would not be proper to in- 
sist that the normal rate of wages is caused by this business 
on the margin of profits, but that the natural or normal rate 
of wages is indicated at this point. It is merely a process 
of excluding more complex elements and returning to the 
simplest phase of industry in order to allow wages to stand 
alone. If this indicates the normal rate of wages, other 
more prosperous industries, or those demanding greater 
skill, might return a larger amount in the form of wages. 
The normal rate of wages could be determined in no other 
way, although competition in the market brings wages to 
a general level in different groups. 

193. Competing Groups. — There are everywhere low- 
pressure and high-pressure competitive groups of labor. 
Thus, in the iron industry we find competition of groups 
of miners, smelters, puddlers, etc. In the machine shop 
there are competitive groups of men in specialized occu- 
pations. So in the woolen industry there is a general com- 
petition of all laborers employed and a special competition 
among those especially prepared for a given service. Also, 
it appears that in the division of labor originally, these 
groups were formed because each laborer had a special 



WAGES AS A FACTOR IN DISTRIBUTION 

occupation. As the division of labor becomes excessive, 
we find the tendency for labor to become more mobile. 
That is, as it takes but little time for a person to learn one 
thing, he may pass more readily from one industry to 
another; thus the barriers between industries appear to 
be broken down ; yet there are other things that interfere 
with the mobility of labor. The specialization, requiring 
greater skill before confidence is established, and also the 
fact that through labor unions and methods of business, 
employers are not willing to take up with persons who have 
left one industry to enter another, make it quite difficult 
to render labor mobile. Should a scarcity of labor appear, 
then it would be easier for labor to shift from one occupation 
to another. The result of competition in the high-pressure 
group is to turn the surplus labor of this group into others 
and to turn the surplus of all groups into the unskilled labor 
group which is composed of the rank and file of the unem- 
ployed. Wages are thus subject to a general law of com- 
petition of all laborers, and a special law of special groups. 
194. Influence of Labor Organizations on Wages. — The 
influence of labor organizations on wages is a disputed point 
among economic writers. That labor organizations have 
had at least a general influence on wages, cannot be denied. 
In so far as they have been successful in limiting the sup- 
ply of labor in a given field, they have succeeded in raising 
the rate of wages. In so far as they have created monop- 
oly of labor, they have developed a monopoly of wages. Yet 
it will be found that their greatest influence has been in 
agitation, in creating a demand for higher wages, and in 
strikes which have resulted in forcing employers to pay a 
fair rate, or what the business would allow. While funda- 

223 



ECONOMICS FOR HIGH SCHOOLS 

mentally the great law of supply and demand must regu- 
late general wages, it cannot be denied that the influence of 
labor organizations has done considerable in keeping up the 
rate of wages. Yet it must be conceded while they have 
advanced wages, they have contributed somewhat to the 
army of the unemployed by making it unprofitable to carry 
on certain industries at the high wages demanded. Their 
influence on wages from the direct standpoint of monopoly 
has been of a somewhat temporary nature ; while their 
influence by creating a higher standard of life and by edu- 
cating public sentiment through agitation and strikes has 
tended to hold up wages. 

195. Business Sense and Wages. — An important cause 
of the increase in wages has been the business sense of 
employers. For instance, in the care of horses two theories 
have been advocated; viz., that to work a horse very hard 
and get all you can out of him in a short time is economy; 
to feed him well, care for him properly, and make him last 
longer is better economy. The same theories were advo- 
cated in regard to slave labor. If horses, mules, and slaves 
yield a larger return by excessive toil, which shortens life and 
gradually lessens labor power, it is not so true of labor. 
A laborer well fed and well cared for will do more work 
and better work for the employer than one who is poorly 
fed and poorly cared for. Hence it is best for the employer 
to look after the welfare of his laborers, and it is not best 
for the employer to have a grinding rate of wages for the 
laborer. Many men have seen this and have advanced 
their own interest by taking good care of the laborers, 
making them capable of earning a high rate of wages, 
keeping them contented and happy, so that they are willing 

224 



WAGES AS A FACTOR IN DISTRIBUTION 

to earn the wages and to interest themselves in their em- 
ployer's work, and finally, by paying a high rate of wages. 
Thus we find that business sense has been looking out for 
the laborer, and has tended to keep up wholesome sentiment 
in favor of higher wages. 

196. Philanthropy and Wages. — Sentiment has much 
to do with economic relations, and a well-administered 
philanthropy has a tendency to create an interest in the 
laboring population and promote advocacy of higher 
wages. Yet it will be found that all permanent movements 
in this respect are based upon business relations and rest 
upon a business basis. The agitation for higher wages in 
behalf of labor has its influence in raising wages, even 
though wages are regulated by general economic laws. 

197. Eight-hour Day and its Effect on Wages, — It is 
thought by many laborers that if the eight-hour day should 
obtain, wages would remain the same for shorter hours. 
Others hold that it would give means for employment to 
a large number of laborers. In fact, the eight-hour day in 
some industries would earn as high wages as the ten, while 
in others it would fall much short. The decrease in the 
number of hours of labor in general would yield a relatively 
large return of wages per hour and a smaller return per 
day. Possibly, with the general adjustments of industry, 
wages would remain the same for an eight-hour day as for 
a ten. Wherever the labor day has been shortened, the 
appalling effects which are generally foretold have never 
appeared. The increase in wages has kept its pace not- 
withstanding the decrease in hours. 

198. Gradual Increase in Wages. — One of the most 
striking phases of modern economic life is the constant 

Q 225 



ECONOMICS FOR HIGH SCHOOLS 

increase in wages. This, of course, has varied on account 
of local disturbances and periods of depression, while, as 
a rule, there has been a persistent rise. In looking over 
the advance in wages in the United States and England 
during the past iifty years, it will be found that the rate of 
wages was very low when we had a high inflation of cur- 
rency. This was caused by the difference between nominal 
and real wages. It is an illustration of the principle that 
in all movements of money involving the rise or fall of 
prices, wages are the first to be affected in the fall and the 
last to be affected in the rise. Therefore, a sudden and 
radical change in the currency has a significant effect on 
the rate of wages. 

199. Improvement of Wages by Legislation. — It used 
to be customary in England for the justice of the peace to 
regulate wages for a given period. Indeed, it was a strong 
theory in the early modern period that fair wages should 
be established by law rather than to be trusted to com- 
petition and demand. But this custom, which was arbi- 
trary and useless, finally gave way to free competition, until 
in modern times no attempt has been made to regulate 
wages in industry by legislation. Yet the protective power 
of legislation in creating better sanitary conditions, in in- 
sisting that the laborer has a right in the product, and in 
guaranteeing his wages has had much to do with pro- 
moting the rights of the laborer, and this has an indirect 
influence on wages. This is the only real benefit that leg- 
islation can have to advance the rate of wages. 

200. Economic Signification of Wages. — The discus- 
sion of wages belongs to economic distribution. It is very 
important in the general economic effect of society. Well- 

226 



WAGES AS A FACTOR IN DISTRIBUTION 

paid laborers are great consumers, and consumption creates 
a demand for goods. A body of well-fed, well-paid labor- 
ers is in a measure a test of the prosperity of a country, 
and to a certain extent the index of its civilization. This 
latter is especially true if the laborers are honest, reliable, 
and of good physical and moral health. 

References. — Clark, J. B., " Possibility of a Scientific Law of 
Wages"; Wood, Stuart, "Theory of Wages"; Mill, John Stuart, 
" Principles of Political Economy " ; Walker, F. A., " Principles of 
Political Economy"; Taussig, F. W., "Wages and Capital"; 
Ashley, W. J., "The Adjustment of Wages." 



227 



CHAPTER XX 

INTEREST AS A FACTOR IN DISTRIBUTION 

201. Nature of Interest. — Income that comes to capital 
is called interest. It is sometimes used to designate the 
entire yield of capital before current expenses, risks, and 
repairs are taken out, when it is then called gross interest. 
Net interest is the result after these contingent expenses 
have been deducted, and is the true income on capital 
itself. 

202. Economic Interest and Loan Interest. — We should 
also distinguish between economic or natural interest and 
contract interest. Economic interest is actual return to 
capital on account of its value-creating power in the pro- 
cess of production. Loan interest represents simply con- 
tract interest, and is the amount paid to the lender by the 
borrower for the use of capital. In the ordinary treatment 
of interest, loan interest is considered rather than economic 
interest. The loan interest may be greater than economic 
interest, but in the long run it tends to approximate it 
when the two elements of risk and commission are left 
out. The chief difference between economic interest and 
loan interest lies in the variation in loan interest caused 
by the favorable or unfavorable condition of the loan. 
Thus, current rates for short loans generally vary greatly 
from current rates for long loans. But there is a normal 

228 



INTEREST AND DISTRIBUTION 

rate to which the variations of current rates usually tend 
in a community, which comes very nearly the economic 
interest, — just as contract wages or contract rent tend 
to conform to economic wages and economic rent, respec- 
tively. The essential fact in interest does not necessitate 
a loan, for interest arises from the use of capital even when 
it is used by its owner. The man who engages in business 
for himself and allows in his accounts a record of the 
interest on his own capital, not only observes a good busi- 
ness principle, but also approximates an economic truth. 
He usually records the current rate, but recognizes the in- 
come that naturally arises from capital. 

203. Development of Theories of Interest. — There have 
been very many theories respecting interest advanced by the 
people of ancient time, as well as by different economists. 
This fact, however, does not interfere with a true theory 
of interest. All interest was called usury by the people of 
the Middle Ages. And indeed the Bible calls interest 
usury, and speaks decidedly against the man who takes 
usury. When the Hebrew writers urged against the charge 
of interest, the economic life was entirely different from 
what it is at the present day. Capital was then loaned 
for the purpose of relieving distress, without thought of 
putting it in business for the purpose of earning a large re- 
turn to the borrower. Aristotle held that money was a 
barren thing; that it could not beget money, and therefore 
that it was wrong to charge interest. In the first place, 
his mistake was in supposing interest was charged on money 
instead of on capital, of which money was only a single 
form. In the second place, the modern process of eco- 
nomic production had not yet appeared. 

229 



ECONOMICS FOR HIGH SCHOOLS 

Aristotle says that the most hateful of all ways of earning 
money is usury, which makes a gain out of the money itself 
without the natural use of it. " For money," he says, 
" was intended to be used in exchange, but not to increase 
interest. And this term usury, which means the birth of 
money from money, is applied to the breeding of money 
because the offspring resembles the parent. Therefore, 
of all modes of making money, this is the most unnatural." 
But Aristotle, with all his wisdom and learning, could have 
known nothing of the industrial revolution, of division of 
labor in its extended form, of power manufacture and the 
consequent modern uses of capital, and therefore could have 
well assumed that a thing might be quite unnatural in his 
day which is quite natural in our day. 

In the Middle Ages the writers and ecclesiastics treated 
the subject more thoroughly; and at the close of this period, 
when political economy was gradually developing, many 
of them finally acknowledged the right of interest to exist, 
— a conclusion not reached through their philosophy, for 
they counted the practices of the world all wrong and 
could not learn of them. The old canonists of the twelfth 
and subsequent centuries tried to argue against the 
payment of interest as an abhorrent thing. Thus Gon- 
zalez Tellez wrote, " So, then, as money breeds no money, 
it is contrary to nature to take anything beyond the sum 
lent, and it may with propriety be said that it is taken 
from industry than from money, for money does not 
breed, as Aristotle has related." 

There were four points in the doctrine of the canonists, 
viz. : — 

I. Loan interest is simply an income which the lender 

230 



INTEREST AND DISTRIBUTION 

draws by fraud or force from the borrower. 2. The 
lender is paid in interest for fruit which barren money can- 
not bear. 3. The lender sells a use which does not exist, 
or which in reality belongs to the borrower. 4. The 
lender sells time, which belongs to the borrower just as 
much as it does to the lender and to all men. In every 
sense interest appears as a parasitic profit extorted or 
filched from the defrauded borrower. These illogical 
and unjust arguments appear very crude to us to-day, 
who have so long been accustomed to the payment of in- 
terest. Yet they serve to illustrate the truth that former 
ages had their vagaries, visionary theories, and dogmatic 
teaching. During the sixteenth and down through the 
eighteenth centuries the arguments against interest gradu- 
ally subsided. The world went on practicing the use of 
interest without taking heed to the sayings of the philoso- 
phers. Sometimes in recent years people revive the old 
controversy in a new way, apparently not conscious of the 
exploded theories of former days. 

Among modern economists there have been a variety 
of views set forth, some of them of entirely opposite char- 
acter. Thus, James Mill and McCulloch held that inter- 
est was nothing but the wages of labor stored up in capital, 
and as all capital was originally formed of labor, that the 
interest on the capital corresponded to the wages of labor. 
The explanation of the origin of capital and its service in 
production would indicate that this is not only a confusion 
of terms, but also hints at that which is not true. It was 
held by Turgot and supported by Henry George that in- 
terest derived its reason to be on account of lie capital 
which brought forth a return without accompanying labor. 

231 



ECONOMICS FOR HIGH SCHOOLS 

Thus land, animals, bees, and wine would yield a return 
without labor. From this as a starting-point, they held 
that other capital should have the same return. This 
traces interest to a natural source. More recently Menger, 
J. B. Say, and Hermann held that capital brought forth 
interest because of its especially favorable investment, 
which yielded a return over and above its normal produc- 
tivity. Other writers have tried to show that capital has 
some peculiar power of increasing so that interest will grow 
out of it under all circumstances; but these people over- 
look the idea of time, of risk, and of abstinence, or the spe- 
cial diversion of capital into certain channels. While absti- 
nence is not the cause of interest, it is indispensable to 
the formation of interest, because through it capital is 
placed in a condition of service. 

Another very erroneous idea is that interest is robbery; 
that the product ought all to go to labor, but a robber 
seizes that which belongs rightly to others and calls it 
interest. These writers, among whom are Marx and 
Rodbertus, hold that there is no rational cause for interest. 
If told that because a man owns property he has a right 
to pay for the same, the followers of these writers have 
asserted that man has no right to private property, and they 
cry out with Proudhon that " property is robbery." 
They claim if labor had received its share of the net earn- 
ings, there would be no capital accumulated in the hands 
of those who do not labor. But this does not say that the 
capital would not have its existence, and that the laborers 
of this life are the capitalists; they are the ones who save 
and who obtain a return from their savings. In reality, 
granting two points, — that a man has the right of property 

232 



INTEREST AND DISTRIBUTION 

and that the laborer has the right of wages, — one has no 
more right to ask a man to allow him the use of capital 
without return than he has to ask a person to work without 
a return in wages. 

204. Interest a Premium on Exchange. — In his ad- 
mirable work on capital and interest, Bohm-Bawerk 
gives a careful review of all theories, and finally advances 
his own, which seems to throw much light upon the sub- 
ject. He holds that a loan is an exchange of present goods 
against future goods. On account of the ordinary desires 
of man to value present things more than future ones, a 
lump of capital is worth more to-day than its future valua- 
tion for a year from to-day. Hence, if present commodities 
command a premium over future ones, it is to be observed 
that a sum of present wealth is to be had only at the price 
of a greater one in future. This premium is the net inter- 
est. This places all loans on a purely exchange basis, 
and makes interest the difference in the price of a commod- 
ity of to-day from the same commodity a year from to-day. 
It is a simple business way of estimating interest, and dis- 
poses effectually of the theories which have been advanced 
to show that money is barren, or that money is fruitful 
in itself, or that interest is robbery. That is, you have 
a horse which I ask you to loan me for a year. To-day 
the horse is worth $100. But I will not agree to give you 
$100 for the horse a year from to-day, because, supposing 
that he will be in as good condition then as now, a year's 
service has gone. Hence, if I borrow the horse for a year, 
I must return something besides the horse to make an even 
trade. It is the same with the $100 being worth more 
money to-day than it will be a year from to-day, — I agree 

233 



ECONOMICS FOR HIGH SCHOOLS 

to pay that difference, which is $8 or $6, as the case may be. 
This is called interest, and may be paid now or a year from 
now. This interest is usually calculated by a given rate 
on the principal, which is sometimes misleading. 

205. Rate on Loans. — The rate on loans varies 
slightly during a long period of time. There is a steady 
decline in interest as society becomes more stable and 
business investments more permanent. But the rates 
vary in different countries as well. In England interest 
is lower than in Boston, and it is lower in Boston than 
in newer countries. The chief causes of this are, first, 
the amount of available capital seeking employment in 
older countries; and, second, the element of risk. People) 
do not like to take the risk of loaning money in new and 
unsettled countries or in lands far away from home. In 
the former case, they will do so if the interest is large 
enough to tempt them to take the risk; in the latter case, 
if interest is sufficient to cover risks and agents' commis- 
sions, they may make loans. I said that the rate of interest 
continually decreases, although the process is a slow one 
if we exclude the element of risk, which may cause a 
sudden change in the interest at any time. 

Other things being equal, the rate of interest will depend 
on the amount of available capital seeking employment; 
or, in other words, upon the demand and supply. But 
other things are not always equal. For example, in 
times of panic and unsettled business there may be plenty 
of money with interest low, or at certain stages there 
may be plenty of money and interest high; but where a 
large amount of money seeks honest and legitimate invest- 
ment, it must have an effect in lowering interest. The 

234 



INTEREST AND DISTRIBUTION 

rate of interest will vary, secondarily, according to the 
desire of people to enter new business, and it is also some- 
what dependent upon the character of the borrowing 
community. If the latter has a record of paying debts 
promptly and without failure, more favorable terms of 
interest may be had, while, if there are doubts as to its 
solvency, the rates of interest are higher. 

206. Effect of Cheap Money on Interest. — Some 
people, and even some economic writers, have been mis- 
taken as to the effect of a cheaper money on interest. If 
the purchasing power of money could be reduced one 
half, it would not cheapen interest, as an inflated currency 
has no perceptible influence on interest. For if the in- 
terest is paid by a given per cent, the same proportion of 
the cheap money will go to pay the debt. In another 
way, however, inflation frequently leads to speculation, 
and this brings on a higher rate of interest. If, however, 
a debt is contracted in one form of money and the interest 
made payable in another, dearer form of money, then 
interest will be increased directly by inflation. 

207. Legislation and Interest. — One of the most 
difficult points to consider in relation to interest is the 
result of legislation on interest by passing a law to reduce 
it below the current commercial rate. The general ten- 
dency of all legislation to reduce interest is to make it 
more difficult for the borrower. However, there are some 
things to be observed in connection with this general 
assertion. So long as a state can by the power of legis- 
lation change the custom or habits of the people, there 
is some governmental power in the reduction of interest. 
Suppose the current rate based upon the supply and 

23s 



ECONOMICS FOR HIGH SCHOOLS 

demand in a given state should be eight per cent, and 
suppose the law-making power should suddenly pass a 
law that no more than five per cent should be charged, 
and fix a heavy penalty for disobeying the law. Two 
things will occur: first, money will seek other countries 
for an investment and the current rate will rise; second, 
the law will be evaded, if not violated, and those persons 
who borrow money will suffer. However, if in this given 
state people have been charging a large interest through 
long custom, and lenders have a sort of monopoly on 
loan funds, laws may be passed asserting, for example, 
that six per cent is the proper rate of interest ; this meas- 
ure will have a large influence in the reduction of inter- 
est, if there be a considerable amount of home capital. 
For the borrower will borrow less money, rather than 
take it at a price which is declared exorbitant. And 
lenders, rather than have their money idle and rather 
than have it leave the state for higher rate, will loan at a 
lower rate. Likewise lenders will slowly adjust them- 
selves to the new rate, simply because their attention has 
been called to the fact. 

It is not the law so much as custom, education, and, 
indeed, religion that keeps the rate below this maximum. 
On the other hand, without any collusion, the banks of a 
small town may demand a certain rate because they have 
always charged a certain rate, and thus refuse to take 
less. People who must have money will pay the charges 
rather than go without; but the same custom is observed 
to a large extent in merchandise in a small town, because 
it is slow to feel the rise and fall in the general market. 
Custom rules to a considerable extent, although these 

236 



INTEREST AND DISTRIBUTION 

are really exceptions to the general law. Legislation 
for the reduction of the rate of interest has generally 
proved to be a dangerous thing for the borrower. A law 
fixing a maximum rate is very valuable in cases where 
no rate is mentioned in contracts, or where a judgment 
for interest is rendered. It also to a limited extent pre- 
vents extortion in certain cases. This is absolutely essen- 
tial in all well-regulated countries. 

208. Interest as an Economic Factor in Distribution. — 
While it has been stated that land and labor are the two 
essential factors in production and precede capital in 
logical order, it is also known that when capital is once 
created it enters into production and claims its own 
reward in interest. Interest must always be satisfied 
wherever capital is used in production. The wages of 
labor and the rent on land are not more certain than the 
interest on capital. In the process of production many 
people go into business who are not capable of manage- 
ment, and interest finally absorbs their earnings, and the 
result is they must quit business. But this does not 
militate against interest as a natural factor in distribution. 
Capital is a necessity in modem production, and its just 
reward is interest, which must be paid. 

References. — Clark, J. B., "Capital and Its Earnings"; 
Bohm-Bawerk, Eugene von, "Capital and Interest"; Ely, R. T., 
"Outlines of Economics"; Cassell, G., "Nature and Necessity of 
Interest." 



237 



CHAPTER XXI 

PROFITS OF BUSINESS MANAGEMENT 

209. Gross Profits. — Some economists classify all 
the returns of industry as profits, including rent for the 
use of land, interest on capital, and profits of manage- 
ment; but profits of management concern us most 
in the present analysis. Gross profits must be distin- 
guished from the profits of the entrepreneur, or manager, 
which are called pure profits. If we would consider any 
given business, we would find that there must be a replace- 
ment of the amount of capital used out of the entire re- 
ceipts of the year; that the interest on capital must be 
paid, and also a certain sum in the form of payment for 
risk must be set aside to tide over bad years; and that the 
wages of superintendence must also be paid. If there is 
anything left out of the returns for a single year, we call 
it pure profits, which goes to the manager of the business. 

210. Pure Profits. — If we consider normal industry, 
we shall see the division of the net product into the differ- 
ent shares accruing to landlord, capitalist, and laborer; 
we shall observe that industrial enterprises go on from 
year to year working on this basis. The managers of 
business may receive nothing more than the wages of 
superintendence. So long as they receive this, business 
will continue, but if they fall short of this, business will 

238 



PROFITS OF BUSINESS MANAGEMENT 

cease. But there are certain concerns more favorably 
situated or better managed than others, which yield a 
surplus of profits over and above the payment of the 
ordinary expenses of business. This surplus of pure 
profits accrues on account of excessive skill of manage- 
ment. It has sometimes been called the rent of superior 
characteristics. It more naturally falls into this cate- 
gory than any other. Yet according to most writers it 
is called profits, and we follow the rule to avoid confusion. 
Business ability or the quality of management makes 
the return of profits uncertain and indefinite. Never- 
theless it is true that all businesses can be arranged in a 
group, passing all the way from no-profits industry to 
that of a large return. 

211. Competition and Profits. — Competition also de- 
stroys pure profits, or tends to reduce them. The person 
who obtains some means of producing cheaply, or has 
obtained a desirable location, or by skill in advertising 
has succeeded in making a large profit, cannot continue 
long before others discover his secret and enter the same 
field. Hence, in any given industry, profits continue to 
decrease gradually; and the older the country, the more 
rapidly they decrease. Hence there is a tendency to 
level down profits. The immense profits of a large num- 
ber of enterprises are founded on secrecy or monopoly. 

212. The Managing Class. —The power of the manag- 
ing class in business is very great. An observation of 
the number of failures in business of any sort is evidence 
of the need of skill to conduct business properly and 
with profit. Thousands, presuming upon a skill they 
did not possess, have wrecked their business and dragged 

239 



ECONOMICS FOR HIGH SCHOOLS 

others down with them. In discussing the labor prob- 
lem, or the problem of capital, not sufficient importance 
has been given to the managers of business, who are the 
true employers of labor, nor sufficient credit for their 
part in productive enterprises. Without them the wheels 
of industry would stop; the modern process of produc- 
tion includes them as essential factors. 

213. Profits and Rent. — ^ As was stated above, the 
pure profits are to a certain extent governed by the same 
law as that of rent. The power to command profits 
must rest upon exceptional opportunities and exceptional 
abilities which, combined, make profits possible. There 
are a large number of people who are doing business for 
the sake of profits who obtain no return. All that their 
business pays is the wages of labor, interest on capital, 
and wages of superintendence, together with other ex- 
penses such as rent, taxes, insurance, etc. Pure profits 
do not emerge in the transaction. The result is that 
these business enterprises will continue to run until a 
fall in price or depression in trade causes them to close. 
Other businesses in the same line, on account of favorable 
location, the prestige of business through trade-marks, 
advertising, and other means, or through superior skill 
of management, yield a return in pure profits. It is 
easy to observe that the principle here is the same as that 
of rent. The chief difference is that profits arise from 
very uncertain conditions. There is less regularity in the 
appearance of profits than in the appearance of rent; 
nevertheless, the principle involved is the same. While, 
strictly speaking, there might be no condition of business 
in which gross profits might not rise, there might be con- 

240 



PROFITS OF BUSINESS MANAGEMENT 

ditions of business in which pure profits might not be 
seen. But even this condition cannot long continue, 
for the entrepreneur who makes no return in a given year 
hopes to make a profit the year following. When he 
realizes that he does not receive profits, unless he be 
manager of his own business and receives wages of super- 
intendence, he will cease to carry on business. 

2 14. Pure Profits and Market Prices. — It is evident 
that pure profits do not enter into the price of commodities 
in the market, nor do they interfere with wages in any 
form. Profits themselves are obtained from wealth, 
which Is created by extraordinary abilities or opportu- 
nities. The price of manufactured goods in a market 
is determined by the supply and demand, and the price 
has a tendency to fix profits rather than profits the price. 
The market price of goods is always indicated by the 
cost of production of that proportion of the supply which 
is produced under the most disadvantageous circum- 
stances, just as the corn raised upon the poorest soil cul- 
tivated is an indication of the market price because the 
soil will be cultivated when it will barely pay the cost of 
production. Therefore the cost of production on poor 
land is evidence of the market price of the product. The 
same is true in regard to profits. The no-profits enter- 
prise shows the cost of production, and as long as it pays, 
the work will be carried on; that is, as long as the market 
price covers the cost, the business will continue. Thus 
the no-profits business is an indicator of the market price, 
rather than a cause. Hence it will be seen that profits 
have nothing to do with the establishment of the market 
price, 

R 241 



ECONOMICS FOR HIGH SCHOOLS 

215. Monopoly Profits and Monopoly Prices. — Else- 
where we have referred to monopoly prices and monopoly 
profits. All profits are either necessary, temporary, or 
monopoly profits. The necessary profits are that portion 
of the gross profits which keeps business running and 
without which business would cease. Temporary profits 
are those that are obtained from advantageous situation, 
opportunity, and skill of management, and are considered 
as pure profits. Monopoly profits arise when exclusive 
control of a given business is obtained, and are essentially 
more permanent than others. They arise from the uni- 
versal control of a given business in which competition 
is shut out. The monopoly price is established on the 
basis of the largest possible return to a given business. It 
is only necessary to determine at what net price the busi- 
ness will yield the largest return of net income. For 
example, if we consider the possible prices of a given 
commodity to be six, eight, nine, and ten cents per 
pound or article, it is observed that if nine cents per 
pound, there will be a given amount sold. If the price is 
raised to ten, the sales will be less, and consequently ex- 
penses somewhat lessened in proportion to the sale. If 
the price is reduced to eight, the sales will be increased 
until the demand is satisfied. But with the increase of 
sales will be the increase of expenses. If the price is 
reduced to seven, the sales will be enlarged and the ex- 
penses increased. Now, at what point will be the largest 
net return? This point will be when the sales are rela- 
tively large and the expenses relatively small. Every mo- 
nopoly working on a business basis will seek to find this 
monopoly price; though it has the power to charge a high 

242 



PROFITS OF BUSINESS MANAGEMENT 

price, it will not do so unless it can increase its in- 
come thereby. As a rule, permanent monopoly prices 
are steadier and lower than competitive prices; and in 
most businesses it is true that the actual price is lower 
than the permanent monopoly price, for fear of com- 
petition which might set in where there are evidences 
of enormous profits. For nearly all monopolies are sub- 
ject to changes, and may not be considered absolutely 
necessary or permanent affairs. 

216. Trading Power as a Factor in Distribution. — 
There is no law of economics yet discovered that will 
determine the actual returns to each unit of labor, land, 
capital, or managing ability. The laws of distribution 
merely show the relation of one kind of income to another. 
There are necessary incomes in the forms of wages, interest, 
rent, and profits. Without these the equilibrium of eco- 
nomic society will be disturbed. Labor, land, capital, 
and managing ability must each have sufficient income 
to perpetuate its life. That is, these factors will not 
guarantee service unless they have sufficient remunera- 
tion to preserve and perpetuate their economic life. But 
after these necessary incomes have been satisfied, there 
remains a surplus which is distributed in proportion to 
the bargaining power or competitive power in the market. 
The actual market price of an article contains something 
more than a necessary rent, interest, wage, and profit 
involved in its production. There is a surplus of indefi- 
nite amount, over and above these necessary components. 
By the exercise of business ability, by shrewdness in trade, 
by taking advantage of the market, each individual is 
seeking a large share of the surplus. It is out of this 

243 



ECONOMICS FOR HIGH SCHOOLS 

surplus that immense fortunes are made. It is this sur- 
plus which causes the maddening struggle for wealth. 

References. — Walker, F. A., "Political Economy"; Hadley, 
A. T., "Economics"; Ely, R. T., "Outlines of Economics"; Hob- 
son, John A., "The Economics of Distribution"; Clark, J. B., "The 
Distribution of Wealth." 



244 



CHAPTER XXII 

COOPERATION AND PROFIT SHARING AS PROCESSES OF 
DISTRIBUTION 

217. Nature of Cooperation. — There is unconscious 
cooperation of all people engaged in production. There 
is also the conscious cooperation of people in the form 
of firms, trusts, corporations, and business houses. But 
cooperation in its purely economic sense means a union of 
laborers in a given enterprise, either of production or dis- 
tribution. Where laborers band together, use their own 
capital, manage their own business, pay themselves wages, 
and thus have a right to the entire product of the industry, 
we call it cooperation. Cooperation of this nature is a 
process of distribution. During the last half century 
many attempts have been made to carry on this kind of 
cooperation, more or less of which have been successful. 
The real object is to get rid of the manager of business, 
who obtains the pure profits for himself, and make a divi- 
sion of these profits among the laborers. After wages, 
interest on capital, and the general expenses of manage- 
ment have been paid, the surplus earnings are divided 
among the members of the cooperative association. 

218. Distributive Cooperation. — Cooperation is gen- 
erally considered of two kinds : distributive and productive. 
Distributive cooperation is a trade operation for the dis- 

245 



ECONOMICS FOR HIGH SCHOOLS 

tribution of goods, on a profit which is to accrue to all 
members of a given association. For example, an asso- 
ciation is formed for the purpose of conducting a store with 
special privileges to its members ; an individual is employed 
to manage the store, clerks are hired, and wages paid. 
Money is borrowed on which interest is paid, and all the 
ordinary expenses of the business are paid the same as 
in any other mercantile enterprise. Each member of the 
association puts in a certain amount of capital, which be- 
comes the basis of the stock. Members then have special 
privileges of buying. They either buy their goods at a 
reduced rate, or, what is better, buy at an ordinary rate, 
receiving tickets stating the amount purchased. At the 
close of the quarter or of the year, when all expenses have 
been paid and capital replaced, a division of profits occurs, 
on the basis of the amount of purchases of each individual. 
The Grange stores and the Farmers' Alliance stores of the 
United States have been the most prominent examples of 
this kind of cooperation in America. In England numer- 
ous societies have been formed in the past sixty years, 
and also in France and other countries. In England and 
France, especially the former country, distributive co- 
operation has been carried on with great success, although, 
as a rule, the experiment has failed in America. 

219. Productive Cooperation. — This involves the crea- 
tion of goods. For example, a number of laborers desiring 
to get rid of the managers, or " bosses," as they are termed, 
band themselves together, each one putting in a certain 
amount of capital to start the business. They either choose 
one of their members as an overseer, or hire some one for 
this purpose. Virtually they are laborers without masters, 

246 



COOPERATION AND PROFIT SHARING 

directing their own business and seeking to obtain the entire 
surplus of their earnings. If business enlarges, they may 
take in more members or hire laborers to help. The goods 
manufactured are sold on the market in competition with 
goods of other firms. At the close of the business year, 
after they. have allowed themselves wages, paid the inter- 
est on capital and the wages of management and all ex- 
penses of the business, they divide the profits or share the 
losses of the business. Wherever opportunities have been 
favorable for the development of cooperative business and, 
from the first, good management has been secured, produc- 
tive cooperation has succeeded. But it is much more diffi- 
cult than distributive cooperation, and therefore has not 
met with the same success, 

220. Distributive Cooperation in England. — The most 
remarkable success of distributive cooperation has been in 
England. Robert Owens and others agitated the question 
of cooperation largely upon a communistic basis, and from 
1820 to 1840 numerous experiments were tried in England, 
nearly all of which completely failed. In 1840 a group of 
weavers calling themselves the Rochdale Pioneers formed 
a cooperative association and opened a small store. It ap- 
pears that at this time retail prices were very high, and that 
articles furnished laboring men were of a very poor grade. 
The aim of this cooperation was to furnish good, substan- 
tial, unadulterated articles at a fair price to the members 
of the association. They began with a very small capital, 
each one furnishing a pound sterling, which was to be paid 
in installments. The establishment flourished and en- 
larged, becoming a successful business enterprise. Other 
societies were soon formed, until there are a large number 

247 



ECONOMICS FOR HIGH SCHOOLS 

in England carrying on a successful business. After a 
large number of retail establishments had been formed, 
they began to organize wholesale establishments. So that 
England to-day has a system of distributive cooperation 
extending throughout the United Kingdom. 

The Rochdale society grew from a small membership 
and an insignificant business, with a small store, into three 
large cooperative branches, having, in 1895, 19,064 mem- 
bers; a share and loan capital of ;^476,222; an annual 
trade of ;^402,222, which yielded an aimual profit of ;i^57,776. 
More than this, the movement that started in Rochdale 
spread throughout the entire country, until in 1895 there 
were i486 distributive societies, having 1,314,093 members. 
The share, loan, and reserve capital amounted to ;^i 6,494,630, 
and the annual trade to ;^34,2 24,8i5, which yielded a net 
profit of ;^4,892,7i2. The principles controlling distribu- 
tive cooperation are so well learned in England that there 
are few failures now, compared with the number of suc- 
cesses. 

In France distributive cooperation has not been carried 
on in such an extensive manner nor with such marked suc- 
cess, although the excellent work done there is remarkable. 

22 1. Productive Cooperation in England. — The success 
of productive cooperation has been of more recent date in 
England. Indeed, it is much more difficult to manage 
than distributive cooperation, for it must depend upon the 
market of goods after they have been created. Numerous 
experiments have been tried in different countries with 
varying success, but it was not until 1870 that the move- 
ment received the impetus which brought it permanent 
success. Several productive societies were formed on a 

248 



COOPERATION AND PROFIT SHARING 

cooperative basis, in which the wage-earners became their 
own managers and secured to themselves all of the surplus 
profits. These efforts were greatly forwarded in 1884 by 
the establishment of "The Labor Association," which 
had for its special work the promotion of cooperation 
among the wage- earners. 

In order to carry out these principles and to obtain these 
objects, branches and lodges of the Association were formed, 
each governed by rules and regulations best suited to the 
ends sought. " It will be seen," says Mr. Neale, " that 
the Labor Association is essentially a propagandist body, 
which seeks to form opinion, and thus to stimulate action, 
and, if it succeeds in calling forth productive societies, 
may serve as a valuable union among them; but does not 
itself propose to engage in any productive enterprise, and 
therefore will not in any way pledge the responsibility of 
any persons who may want to join it, by any sort of com- 
mercial undertaking." By the means of this strong 
agency the cause of cooperation is kept before the people 
interested, and its gospel perpetually preached. 

Take, as an example, the Hebden Bridge Fustian Manu- 
facturing Cooperative Society, Limited, which was organ- 
ized in 1870 for the purpose of manufacturing fustians, 
velveteens, cords, and modes of all kinds. Hebden Bridge 
has long been the center for the manufacture of fustians, 
but the trade had for some time been disturbed, and the 
relations between employers and employees had been 
strained. There was much suffering among the work 
people. When one of their number, an old man, died on 
account of carrying too heavy a burden, it was necessary to 
raise funds by subscription to give him a decent burial. 

249 



ECONOMICS FOR HIGH SCHOOLS 

This was the occasion of forming a friendly society to pro- 
vide for cases of this kind. They fixed the assessment at 
three pence per week, and agreed that the funds should 
be devoted to the establishment of a fustian cutting and 
dyeing establishment. About thirty poor men formed 
the original company. Their subscriptions were at first 
very meager, but they continued to lay aside their earnings. 
When they accumulated ;;^io, it was invested in a coopera- 
tive store in town. It was estimated that it would take 
;^iooo to purchase a dyeing establishment and rent a 
place to carry on the work. They rented a small room, 
and used their spare time to fit it up, and to put in a few 
fixtures. By vigorous work they found at the end of the first 
quarter they had a capital of ;^37 js. and iid. with which to 
begin work. The members did the work at the usual rate 
of payment, and this added to their share of capital. The 
local stores became their customers, and their market en- 
larged to adjoining towns. The society soon had sixty 
members, and they • began to manufacture ready-made 
garments as well as cloth. In 1874 they extended their 
business and opened a dye shop, and in 1886 they enlarged 
their plant and began to weave their own fustians. 

At first, all profits accruing to workers are accredited to 
share account, until they have each ;^20 of stock in the 
association. In 1894 the results of business were as fol- 
lows: the total amount paid to workers as wages was 
;;^i2,85i, and the amount of profit to workers was ;!^642, 
computed on the basis of one shilling in the pound for wages 
paid. The average number of workers during the year 
was 294. Of the 797 members on the books at the close 
of 1895, 297 were workers, 300 were cooperative societies, 

250 



COOPERATION AND PROFIT SHARING 

and 200 were outside shareholders. The capital stock 
was held as follows: workers, £"]2)9^) cooperative socie- 
ties, ;^io,4i5; outside shareholders, ;^8o32. 

Nearly all of the distributive societies divide their profits 
among purchasers according to the amount of the purchase. 
A certain per cent is given to capital, a certain wage and 
profits to labor, and a certain per cent to customers. More 
than this, certain amounts are set aside for education, in- 
surance, care of the sick, etc. Thus, in 1895, the society- 
described above devoted ;;^6o to education. It is one 
of the oldest societies formed. Among the modem socie- 
ties much more attention is paid to education and mis- 
cellaneous expenditures. Many of the manufacturing co- 
operative societies have stores of their own, or else make 
sales in connection with other cooperative stores. In 1895 
there were 155 cooperative societies in England having a 
capital of ;;^9i5,302; sales for the year of ;^i,859,876; 
profits of ;^92,io9, and profits to labor of ;,^i4,235. Dis- 
tributive and productive cooperation has continued to 
develop in England since 1895. 

222. Cooperation in the United States. — The principle 
of cooperation in the United States has been used in very 
many different forms. Communistic societies have been 
established on a religious basis which have involved the 
principle of cooperation, both productive and distributive. 
Very many other experiments have been tried for the pur- 
pose of building a complete social community like the 
Brook Farm experiment in New England and the Icarian 
community in Iowa. In nearly every instance the 
philosophical or religious element entered. More than 
this, the underlying principle was to control the entire life 

251 



ECONOMICS FOR HIGH SCHOOLS 

of the community, — religious, social, political, and eco- 
nomical. 

The two great movements of distributive cooperation in 
the United States were those of the Grange and the Farmers' 
Alliance. The Grange, which was organized in 1866 and 
received its greatest impulse about ten years later, estab- 
lished distributive cooperative stores in nearly every state 
in the Union. These stores were to be owned and controlled 
by the farmers of their several communities, to order their 
goods directly from the manufacturer, in order to do away 
with the so-called middlemen, and thus realize a margin of 
consumers' profits to the members of the association con- 
trolling the store. These stores met with varying success, 
a large number of them finally ending in total disaster. 
Only a few, which had a strong corporate existence and 
had entered somewhat into the nature of monopoly, were 
enabled to survive the stress of competition. There are 
many causes to which the failure of these cooperative in- 
stitutions may be traced. Among the chief of these are 
found the failure of managers to understand their business, 
the lack of union among the farmers in the association, 
the competition of more strongly organized firms with 
plenty of capital, and finally, the political trend of the 
association. 

The Farmers' Alliance, which sprang up somewhat later, 
was but a revival of the old Grange movement ; but the same 
principles were employed, which were to a great extent 
in accordance with the methods of the Rochdale Pioneers. 
Indeed, all distributive cooperation, wherever successful, 
has worked upon this plan. The causes of the failure of the 
Farmers' Alliance were in a measure the same as those of 

252 



I 



COOPERATION AND PROFIT SHARING 

the failure of the old Grange stores, with the exception 
that politics had a wider influence in the latter than in the 
former, and, it may also be said, from the fact that there 
was less need of the Farmers' Alliance store than the old 
Grange stores. For when the latter were started, goods were 
sold excessively high in the West, and agents' profits were 
extortionate; in the former, owing to cheap transportation 
and excessive competition, prices of goods in the West were 
not too high. It must be conceded that among the bene- 
ficial influences of the old Grange store is that of the 
reduction of prices, and the more direct communication 
of retailers and consumers with the wholesalers and manu- 
facturers. A great service was performed in this way, 
not to mention other services of increasing the intelligence 
and the political and social union of farmers. 

Productive cooperation in the United States has many 
brilliant examples of success, and many more of wretched 
failure. Wherever there has been a fair market for goods 
and excellent management in business, these cooperative 
institutions have had a reasonable degree of success. 

In the establishment of any manufacturing business, the 
first thing to be considered is a profitable market. If a 
good market with reasonable profits is assured, there is 
an opportunity for the success of the association. But it 
is also necessary that the association be well organized, 
and that good managers be employed in carrying on the 
enterprise. More enterprises have failed for lack of busi- 
ness management than in any other way. While there is 
an opportunity to save time, material, tools, and to furnish 
an excellent quality of goods on account of the interest that 
laborers take in the industry, productive cooperative estab- 

253 



ECONOMICS FOR HIGH SCHOOLS 

lishments have frequently furnished a cheap grade of goods, 
owing largely to a lack of intelligent management. Per- 
haps the most successful examples of productive coopera- 
tion were found in the cooperative coopering establish- 
ments of Minneapolis, where there was a ready market 
for the finished product, and where an industry could be 
started with a small amount of capital. Other successful 
examples are scattered here and there in different indus- 
tries throughout the United States. 

223. Aim of Cooperation. — The object of the coopera- 
tive society is to interest the laborer directly in his work; 
to encourage him in the hope of reaping the share of the 
profits over and above the fixed charges; and to make him 
an independent business man who shall have a right to 
determine the direction of his own labor power. As soon 
as his interest in the business is established, he takes stock 
and becomes a shareholder, and thus receives the right to 
vote in the management of the affairs of the society. He 
now becomes careful of tools and material; is saving of 
time and prevents waste; and he seeks to make a genuine, 
finished product. There is no need of strikes and lockouts; 
the war between capital and labor is over, because the 
capitalist and laborer are the same. Their common in- 
terests have been demonstrated. 

Whenever productive cooperation can be successfully 
carried on, it has a good influence on society at large. 
Perhaps the labor problem can be solved in no other way 
except in giving the wage- earner a voice in shaping his 
own course, in managing his own business, in employing 
himself instead of being hired as a machine and thrust 
aside at the will of the employer. The idea of copartner- 

254 



COOPERATION AND PROFIT SHARING 

ship in business is elevating in its very thought. But if 
productive cooperation should succeed until a large num- 
ber of workers should be employed in cooperative enter- 
prises, these enterprises would begin to compete with each 
other, and there would be competition by groups instead 
of individuals. What then would happen to those who 
have not yet joined a cooperative association ? They must 
of necessity suffer the results of grinding competition, 
which harms not their more fortunate cooperative brethren. 
But the time may come when these also will be forced to 
become cooperative. The great difficulty is that it takes 
a long time to make good cooperative workers. It is a 
process of education — a slow process. And one of the 
chief reasons of the failure of cooperation in so many in- 
stances is that those who enter it are not cooperative men 
by nature and by training. Its success has finally been 
demonstrated in England, and it helps toward the solution 
of the labor problem; but its judgment is not final or con- 
clusivfe. 

The method of profit sharing differs from both pro- 
ductive and distributive cooperation in the fact that the 
business management is still in the hands of the capitalist 
employer. The laborers share in the profits of the concern, 
but have nothing to say in the management of the business. 
However, in recent years the progress of all successful 
profit-sharing institutions is due to cooperation in which 
the laborers own shares of stock in the business and also 
have a voice in the management of the affairs. 

The method by which profit sharing is carried on is 
best illustrated by a well-known example in America, the 
Proctor & Gamble Manufactory, located at Ivory dale, a 

25s 



ECONOMICS FOR HIGH SCHOOLS 

small town in the suburbs of Cincinnati. The company 
employs about 500 laborers at the factory, besides another 
hundred in the Cincinnati office and on the road. The 
company pays fair wages, and the method it has adopted 
of dealing with its employees has been such as to prevent 
any discontent, strike, or revolution. The firm was estab- 
lished in 1837, and the plan of profit sharing was adopted 
in 1887. It provided for the distribution of the profits 
among the employees after allowing a reasonable salary 
of $4000 to each member of the firm who was actually 
engaged in conducting the business. The laborers were to 
receive the same proportion of the profits as the total wages 
bore to the total cost of manufacturing and marketing the 
product. For example, if the total amount of business 
done was $100,000, the amount of wages paid $20,000, the 
amount of profit made $10,000, then the total cost of mak- 
ing and marketing goods was $100,000 less the profit of 
$10,000, or $90,000. The amount of wages paid was 
$20,000. The amount of profits given to employees would 
then be in the ratio of 20,000 to 90,000, or two ninths, and 
the proportion to the firm would be as 70,000 to 90,000, 
or seven ninths of the profits. The laborer's proportion 
of the profits was distributed among them in accordance 
with the amount of wages earned by each. This plan was 
in force three years, during which the dividend or share of 
the profits averaged i2|^ per cent of the wages. 

In 1890 the firm of Proctor & Gamble was reorganized 
on the basis of the payment of 12 per cent on the common 
stock, if this amount should be earned. This being prac- 
tically the same rate earned by the employees under the 
old plan, it was an easy and advantageous arrangement to 

256 



COOPERATION AND PROFIT SHARING 

adopt a plan of paying employees as their share of profits 
the same rate of dividend upon their wages as was paid 
upon the common stock of the company. This method 
was adopted, and under it profit sharing is now carried on. 
The dividends are paid semi-annually. To illustrate this: 
suppose a man earns $500 a year in wages ; he receives in 
addition a dividend of 12 per cent on this amount, or $60. 
The man that has $500 worth of stock in the company also 
receives 12 per cent, or $60. Thus the laborers and the 
stockholders are upon an equitable basis. All employees 
are entitled to begin to share in the dividends after being 
in the employ of the company for three months ; but if one 
quits work or is discharged before three months' service 
in the company he receives no dividend. At first the la- 
borers were divided into full participants and half partici- 
pants in profits. This was not found to be desirable, and 
all employees were placed on the same basis. Now, full 
98 per cent of the laborers participate in the profits. The 
company reserves the right to deny the dividend to the 
employee for cause, but the amount of this unpaid dividend 
must be paid to other laborers, and does not go to the stock- 
holders of the company. 

The company not only allows sharing in the profits, but 
also encourages employees to acquire a part of the capital 
stock. Any employee may obtain a share of the common 
stock upon the following terms: $10 at the time of appli- 
cation, the balance in installments of not less than $5 each. 
Upon this balance he must pay interest at the rate of 4 
per cent per annum. In the meantime all dividends de- 
clared upon the stock accrue to the purchaser. But the 
certificate of stock is held by the secretary of the company 
s 257 



ECONOMICS FOR HIGH SCHOOLS 



as trustee for the subscriber until the final payment is 
made. There have been up to date about seventy or eighty 
shares taken by the employees, nearly all of which were pur- 
chased at prices varying from $ioo to $128. The company 
has under consideration a plan to go one step farther, and 
guarantee the employees who hold stock against loss upon 
their investment. They find a good many difficulties in 
the way of the practical working of such a guaranty, but 
hope to make it a permanent part of their system. 

Another important feature of the Ivorydale system is the 
pension fund, inaugurated for the benefit of the employees. 
This fund is created by setting aside the sum of $500 semi- 
annually, half of which amount is taken from each profit- 
sharing dividend and one half paid by the Proctor & Gam- 
ble Company. The management of the fund is in charge 
of a board of trustees composed of employers and members 
of the company. A pension is granted to any employee 
who has been in the continuous employment of the com- 
pany for not less than seven years when partial or total 
disability to work has been caused by sickness, accident, or 
old age; and it is the company's intention so far as possible 
to provide those who are entitled to pensions with such 
work as they caii readily perform, at such wages as the 
work is worth. The introduction of the pension fund is 
of recent date, but on January i, 1895, there was $2000 
in the fund, with one pensioner upon the rolls. 

One other economic condition is found in the building 
and loan associations, which have enabled a few to build 
their own homes, and this is encouraged by the company. 
The attempt to improve the social life of the employees 
has met with less success. Although library, reading room, 

258 



COOPERATION AND PROFIT SHARING 

and card room have been provided free, they have not met 
with the success anticipated when inaugurated. This 
is doubtless owing to the many mutual-aid clubs, which 
furnish greater attractions than the reading room and the 
library. In seeking enjoyment, laborers have a tendency 
to scatter into other groups, rather than to associate among 
themselves in a single group; also, the widely separated 
position of the homes renders compact grouping almost im- 
possible, as about one half live near Ivory dale and the 
rest live in the city of Cincinnati. 

When an employee is injured or sick, the physician em- 
ployed by the company cares for him. The company also 
continues the wages of the injured employee through the 
period of his disability, and seeks to emphasize the fact that 
employer and employee are associated for a common inter- 
est. Many methods are taken by the managers to show 
their interest in the employees. Thus, on Christmas Day, 
1893, three hundred turkeys were distributed among the 
heads of families. And after each semi-annual pay day, in 
January and July, a day is set apart for a general celebra- 
tion, in which employers and employees engage. The day 
is taken up with games, sports, and general jollification. 

The entire profit-sharing enterprise is established on a 
business basis. Although altruistic motives may have been 
at the foundation of this scheme, it was originated for the 
improvement of the business with the belief that the bene- 
fit of the employee was in the end to be for the benefit of 
the employers. Most of the laborers being unskilled at 
this time and below the average intelligence of skilled 
workmen, it was difficult to persuade them it was not a 
scheme to get more work out of them for a corresponding 

259 



ECONOMICS FOR HIGH SCHOOLS 

equivalent. Also, they were disposed to take the dividend 
as a matter of course and spend it freely and sometimes 
foolishly. But time and experience have dispelled this 
idea. The success of profit sharing there, as elsewhere, 
is a matter of education, and many efforts of profit sharing 
have failed elsewhere simply because the employers failed 
to remember that the employees must be educated up to it. 
Patience as well as justice is required for success. Dur- 
ing the first two years, profit sharing was not a success 
as a money-making investment, but as the men became 
more and more convinced that they were treated with jus- 
tice they became more and more careful and more intelli- 
gent in the work, until it is plainly demonstrated and freely 
admitted that the saving is much in excess of the sums 
paid to wage-earners as profits. 

The success of the plan has exceeded the expectations 
of the company. The gain is in the saving of time, in the 
diminishing of material, in making a better quality of 
wares, in keeping men of experience, and finally, a saving 
of oversight. These are the principles which have been 
maintained by the advocates of profit sharing, and it is 
gratifying to find that they agree with the experience of those 
who have carried it out. There have been no strikes or 
labor troubles of any kind at these works since this plan 
has been in force. Employees remain longer in the service 
of the company, and it is very seldom that a man is dis- 
charged on account of lack of work. It demonstrates that 
the interests of the employer and employee are the same, 
and any warfare between the two classes is an unnatural 
warfare and works against the interests of both parties 
engaged in it. 

260 




COOPERATION AND PROFIT SHARING 

The brief statistical presentation of this example of an 
attempt to solve the labor problem reveals to us the funda- 
mental proposition in the process of its solution ; namely, 
that as interests of capital and labor, of employer and em- 
ployee, are common, and all warfare between them is 
unnatural, any system which will tend to estabhsh this fact 
will have within itself the basis of success, and any system 
which fails to establish this, certainly will not succeed. 
There must be established a solidarity of interests of em- 
ployer and employee upon an economic basis. There must 
be established a feeling that their interests are common. 
Having established this, and acting upon it on the basis 
of absolute justice, any rational plan has the probability 
of success. If this be continued further in the social life, 
so that the employer and employees mingle together on 
a common basis, the barriers now existing between the 
classes will be broken down and there will be a common 
sympathy and trust between them. From the foregoing 
example we may infer that a successful solution of the 
problem rests upon the observance of the following prin- 
ciples : — 

1. The laborer must have an economic interest in the 
product of his own industry to insure care of tools, saving 
of time, saving of material, and the creation of a better 
quality of goods. 

2. He should be received into total or partial partnership 
in the management of the business through stock ownership 
or some similar means. 

3. Both employees and employers should cooperate 
in furnishing means of social improvement. 

4. While working together, the utmost sympathy should 

261 



ECONOMICS FOR HIGH SCHOOLS 

prevail between the employer and the employee, and at 
the same time due respect should be given to the respective 
position and rights of each class. 

5. In order to bring about the above conditions, the 
employers must cease to combine against the interests 
of laborers, and the latter must cease to combine against 
the former. 

6. To gain the confidence of the public in all ejfforts for 
their own improvement, laborers must cease to militate 
against members of their own class, and recognize the 
rights of all men to work for wages according to their own 
choice. 

7. And finally, it may be said, to accomplish the above 
there must be a constant education of both employers and 
employees concerning the rights, duties, and limitations 
of each class and the mutual interests of each class as if 
no class distinction existed either on an economic or social 
basis. And this leads to consideration of individual char- 
acter as causation in social improvement. 

References. — Oilman, N. P., "Profit-Sharing"; Shaw, Al- 
bert, "Cooperation of a Western City"; Warner, Amos G., "Three 
Phases of Cooperation in the West." 



262 



CHAPTER XXIII 

LABOR ORGANIZATIONS 

224. Origin of Labor Organizations. — A reference to 
the origin and history of labor organizations will show that 
they have had a natural or essential development. Just 
as we have the development of government itself or the 
natural process of the evolution of corporations or of other 
social or economic organizations, so we find in the present 
existence of labor organizations the natural outcome of 
the economic conditions of the world during the past two 
centuries. 

After the development of power manufacture in the latter 
part of the eighteenth century, the building of factories 
took place, which made it necessary to assemble large num- 
bers of laborers who worked under the direction of man- 
agers. Capital became organized, and the laborer was left 
to struggle alone against the momentum of great enter- 
prises. All this occasioned a separation of laborers and 
employers and instituted the modern wages system. 
The separation of the capitalist from the laboring popula- 
tion was soon followed by the struggle of laborers against 
employers. It seems that many of the employers were 
harsh, overbearing, and cruel men, and under the new con- 
ditions they cared little for the condition of the laborers. 
And whatever sympathy we may have for the modern 

263 



ECONOMICS FOR HIGH SCHOOLS 

laborer in his attempts to secure kind treatment and justice, 
whatever pity we may have for his ignorance or misguided 
ambition, no one can read the history of the struggles of the 
laboring classes of this period without deploring the misery 
of their situation. The laborers were thrown into evil 
conditions for which they were not responsible ; with four- 
teen hours of labor in great factories with impure air and 
insufficient light, with poor wages and harsh treatment, 
they began to look around for some way of redress. And 
the first means which they took was the attempt to revive 
some old legislation respecting labor, and they urged the 
enforcement of two old laws passed two centuries before, 
which limited the number of hours of labor, the number of 
employees each master weaver might have, and held that 
the number of apprentices in a shop should not exceed 
by more than three the number of journeymen, and which 
reiterated the law that wages should be periodically fixed 
by the justice of the peace. 

Now the first united efforts were for the purpose of pe- 
titioning parliament to enforce these old laws. In this 
the laborers failed, and were convinced finally that theyj 
would look in vain to parliament for redress of grievances. 
Then they began to form unions of their own, uniting inj 
sympathy, mutual aid, and common defense against their! 
employers. At first there were many laws passed against! 
their assemblage for the purpose of labor agitation; lawsl 
making it a misdemeanor for a person to refuse to work] 
when wages were offered him, thus precluding the right toi 
strike. Is it any wonder that, born in those troublesomej 
times, the unions became harsh and bigoted and narrow-| 
minded in their conception of their own interests? The 

264 



LABOR ORGANIZATIONS 

laws, indeed, " had made a crime of what was no crime " 
— the crime to refuse to work in order to obtain higher 
wages. They knew that this law, and all laws respecting 
labor, were full of class injustice, and many of them being 
rude, ignorant men, they were in turn unjust, and as fast 
as power came to them were ready to be unfair. If we 
glance at the unions of to-day we find a great contrast 
between the leaders of these old unions in their bigoted, 
narrow, and cruel lives, and leaders of the modern union; 
and the rank and file of to-day is far in advance of the rank 
and file of the ancient union. Nevertheless, to-day we 
find at times a spirit of the same harsh, narrow, bigoted, 
and short-sighted life, — the folly, ignorance, and selfish- 
ness cropping out in the modern union. But this is usually 
in the smaller unions, belonging to the weaker part of the 
organization, and are conditions which are greatly deplored 
by the intelligent laborers and liberal leaders, conditions 
which are rapidly changing as intelligence increases among 
laborers. 

225. Development of Trade Unions. — From this time 
on, trade unionism developed steadily in England, but not 
rapidly, until the year 1830, when, all restrictions being 
removed, unions sprang into being as necessary organiza- 
tions. It appears from this view of the early origin of 
trade unionism, that it was a normal development, and that 
the capitalistic class on one hand is as responsible for its 
existence as the laborers on the other. It is an expression 
of the right that must hold everywhere, to organize for the 
sake of self- protection; just as the organization of capital 
in production was a normal process of economic evolution, 
so was that of the organization of labor. In reality, the 

265 



ECONOMICS FOR HIGH SCHOOLS 

employers of labor are not more responsible for the condi- 
tion of labor than are laborers for the condition of employ- 
ers, except that capital took the initiative in organization. 

After trade unions had been established, the next step 
in their development was the formation of amalgamated 
associations. There sprang up in England and America 
a tendency to unite, in federal assembly, all the principal 
unions for a common cause. This has been going on 
rapidly, and there has been in the past thirty years a 
strong movement to make one solid organization through- 
out Europe and America. On the one hand, the Knights 
of Labor have stood for this organization on the basis 
of uniting all unions and assemblies in one great body, 
upon a political basis for power, not only at the polls, but 
elsewhere, that they might force all opposition to yield 
to the demands of labor. On the other hand, there is a 
great American Federation of Labor, which desires to 
federate trade unions and to leave each one in possession 
of its own local affairs, yielding to local government. 
There has also been an amalgamation of all unions in the 
same branch of industry throughout the United States, 
such as the International Typographical Union, which 
was instituted in 1850. 

In the United States the first trade union was formed 
by the tailors in New York, in 1806. But labor agitations 
continued in New York at intervals, only a few unions 
being formed down to the year 1830. From that time on 
until 1 85 1, we find a great labor movement and the con- 
stant development of unions of different kinds. This 
received a strong impulse by a meeting of farmers and 
mechanics and other workmen in Boston in 1831. Dur- 

266 



LABOR ORGANIZATIONS 

ing this period mentioned there were numerous strikes 
by the various unions, and strenuous efforts were made 
to reduce the hours of labor. In July, 1833, the work- 
men of the Thompsonville carpet company struck for an 
advance in wages, and the carpet company sued some 
of the strikers for conspiracy. In the trial by jury which 
followed, a verdict was given for the laborers. This had 
a tendency to encourage strikes. Then followed a long 
struggle by the trade unions for the right to exist. The 
matter was finally decided in their favor, and victory was 
achieved. A second industrial congress convened in 
New York on June 10, 1847, received a wide representa- 
tion, and organized labor was recognized as an institution 
of great power and entitled to a position in the industrial 
world. 

But while this period was the time in which organiza- 
tions were struggling for rights, the great time for organi- 
zation and progress in America began in 1861, and has 
continued without cessation to the, present time. Now, 
nearly every trade in America is organized, and there are 
large numbers of amalgamated associations besides the 
American Federation and the Knights of Labor. 

During the summer of 1894, the American Railway 
Union, under the leadership of Eugene V. Debs, came 
into prominence. Its purpose was to organize all railway 
employees into one body and to precipitate a general 
strike, thus blocking the wheels of industry from the 
Atlantic to the Pacific. How nearly the plan succeeded, 
we are all aware. The failure of this for a time gave less 
hope to labor leaders in the efficacy of the strike as a 
means of improving the condition of labor. 

267 



ECONOMICS FOR HIGH SCHOOLS 

226. Knights of Labor. — In addition to what has 
already been stated, the Knights of Labor are an organi- 
zation of employees both skilled and unskilled, and regard- 
less of any trade or occupation. The aim is to break 
down the barrier between the different occupations and 
local unions. They have taken a broader view of the 
social organization of labor, and thus have included not 
only all classes of laborers in their membership, but also 
employers and professional men. Their prime object is 
not that of warfare alone, but a complete organization 
of all the productive forces of industry. They hope, by 
showing the relations of labor and capital and their mutual 
benefits, to demonstrate that there is a necessary imion 
of the two in practical work; but they also claim in this 
union the rights and privileges of the laboring class. They 
have, besides a general national organization, a series of dis- 
trict assemblies, in which a considerable number of trades 
have been united in a common federative group. The 
Knights of Labor at times show great strength, and 
again are weakened by strife and contention. In fact, all 
labor organizations advance and recede in their move- 
ments with the condition of the times, certain conditions 
being more favorable to their development than others. 

There has been an attempt to organize all laborers into 
one great body, not only as a national organization but 
also as international, so that when a strike is declared it 
shall be for the whole world, and industry will be stopped 
until terms are made with organized labor. Up to the 
present this seems to be an impossibility, yet we see 
a growing tendency that way; but that growing tendency 
is also tempered with a conservatism, on the other hand, 

268 



LABOR ORGANIZATIONS 

which would prevent any such radical movement. Should 
it ever come to a test of this kind, the so-called employer, 
or capitahstic class, could endure a strike longer than 
the employees themselves. For indeed at present, when 
one branch of labor is striking, it can be supported by 
another that is earning wages. In Australia at one time 
nearly all laborers were organized, so that industry was 
practically stopped. Yet the laborers were finally obliged 
to yield, although with certain gains. 

227. Objects of Trade Unions. — The first and funda- 
mental principle of trade unions is to insure a just recom- 
pense to labor in the form of higher wages or shorter 
hours. The larger proportion of the strikes that have taken 
place have been for either higher wages or shorter hours. 
The unions also have a large work to do in protection and 
assistance of needy fellow-laborers. This has become 
one of their fundamental laws. The third object is the 
improvement of the social conditions of the wage-earner 
by education and other means. In the modern trade 
union or general labor organization these are the funda- 
mental points to be gained. 

But it must be admitted that in many of their attempts 
the unions have failed, as do all organizations. Indeed, 
the state in which we live is sometimes imperfect and 
has some faults, and the church in which we believe has 
still its defects ; and so, when people censure labor organi- 
zations, they forget that these new organizations, which 
have sprung up according to natural economic laws, are 
also dependent upon the same vagaries of human nature 
and imperfections of human government as are other 
organizations, and, indeed, that ignorance, selfishness, 

269 



ECONOMICS FOR HIGH SCHOOLS 

and obtuseness have a tendency to make all organiza- 
tions imperfect, and frequently unjust. Nevertheless, 
a large number of those who have opposed labor organi- 
zations have failed to consider their natural reason to be, 
and their real beneficial effects. It is true, there were 
many reasons for attacking the unions in their early days, 
but the sensible way is to recognize their helpful prin- 
ciples and to combat their abuses as we do those of the 
church, the state, and the political party. 

Thorold Rodgers, in his work on wages, in speaking 
of labor organizations, says, " A long study of the history 
of labor has convinced me that they are not only the best 
friends of workmen, but the best assistance for employer 
and the public, and to the institution of those associa- 
tions political economists and statesmen must look for 
the solution of many of the most pressing and difficult 
problems of our times." This is rather a hopeful view 
of the question. Nevertheless, it is being verified to a 
certain extent in the fact that employers at large are 
recognizing union men, and as a rule prefer union men 
to non-union. 

But first, and above all, the trade imions have increased 
the intelligence of the laborers. The bare fact of their 
meeting together and discussing the questions of the day, 
the building of libraries, the listening to speeches, and 
the publication of newspapers devoted to laboring in- 
terests, — all of these things have a tendency to give 
increased intelligence to the laborer. But it may be 
added that where this increased intelligence comes there 
is an elevated standard of life which commands an in- 
crease of wages. Of course education and the elevation 

270 



LABOR ORGANIZATIONS 

of the standard of life is also influenced by a limitation 
of numbers in a single trade, and were it not for other 
things, this limitation in one trade would simply over- 
crowd other trades. But this increased intelligence 
leads to the prudential virtues, and a tendency to limit 
population and to maintain a just balance between the 
laborers themselves and the means of development. 

Yet another field in which labor organizations have done 
a great work is that of temperance, for nearly all labor 
organizations are in themselves temperance societies, and, 
indeed, many of their officers are total abstainers. Any 
one acquainted with labor unions can see what a vast 
advantage has been gained in this respect. They have 
improved the quality of labor by means of temperance, 
and intelligence and skill have more rapidly developed. 

The unions have also greatly improved the social con- 
dition of laborers. Any one can go into a laborer's home 
to-day and see there the many comforts of life. There 
are family associations of an elevated nature and of a 
pure and genuine character. One will be forced to admit 
that there has been a wonderful improvement in the 
common laborer since the labor organizations sprang 
up. While not all of his progress is due to organization, 
much of it would have been lost had he stood alone against 
the momentum of capital. 

Besides the foregoing, the labor organizations have been 
compelled to cope with the arbitrary usage of the employer, 
or capitalistic class, and have done something to gain 
those rights which belong to them. They have main- 
tained wages by the force of strikes, if not always in a 
direct, at least in an indirect, way. 

271 



ECONOMICS FOR HIGH SCHOOLS 

228. Mistakes of Unionism, — Yet in spite of these 
many good qualities, the labor organizations all repre- 
sent many weaknesses. Their aim may be industrial 
peace, but they are all prepared for war. The strike is 
their means of warfare; and it is greatly to be deplored 
that it sometimes seems necessary, just as all war is to 
be deplored, though sometimes necessary. Strikes as 
a rule are unfortunate affairs, and in nearly every case, 
unjust affairs, on account of either one party or the other. 
Yet it is true that they have revealed somewhat the con- 
dition of labor to the people at large, and have a vast 
educative influence on the employer, the employee, and 
the lookers-on. It is to be deplored that the real ultimate 
power of the labor organization rests upon the strike; 
and yet in this case we must not be harsh with them, for, 
indeed, it not infrequently happens that though they 
appear as the aggressors in certain labor movements, 
the employers themselves have been the real cause of 
bringing them on. 

It must also be said against them, that they have been 
partial monopolies, with the intention of being complete 
monopolies as soon as possible. We deplore the injus- 
tice and abuse of combined capital, especially in the form 
of trusts, which tend to limit the food supply of people, 
and thus to cause hunger and want and distress; or the 
combination of coal companies in the time of winter, 
which causes poor people to suffer from cold in their 
rude apartments, and leads to disease, pauperism, and 
crime. At the same time we must consider the same 
principle on the part of the laborers who organize strikes 
unjustly for the purpose of making a shortage in labor, 

272 



I 



LABOR ORGANIZATIONS 

and thus to depress and destroy industries. It is the 
abuse of monopoly of labor as the abuse of monopoly of 
capital that is the evil. In themselves they may both 
be turned to good. Each is to be put in the same 
category of good or evil, of justice or injustice. And 
right here it may be stated, that, failing to organize 
all laborers into a class, they turn as enemies against 
the non-union men, or " scabs," as they are called, 
denying them the privilege to earn bread to keep their 
families from starving, and thus show an injustice and 
short-sightedness that is un-American and belongs to 
the times of mediseval barbarism. In this way they hope 
to monopolize labor by controlling all labor within a 
given field of operation. Their object is not an increased 
production, but a question of distribution, or of direct- 
ing a larger supply of distributed goods to their own 
class. 

More than this, in seeking the exclusive interest of class, 
they are in danger of losing interest in the reforms which 
tend to benefit common humanity, and in this they are 
short-sighted and conservative, clinging to old ideas 
instead of accepting new ones. They fight the intro- 
duction of new methods that tend to facilitate the pro- 
duction of economic goods and to benefit general humanity. 
In other words, in attempting to gain an immediate benefit, 
they bring about an ultimate evil to society. 

There are minor evils of trade unions, such as an in- 
terference with the apprentice system. They have dis- 
couraged apprentices to a large extent, and limited the 
number that may be taken by an employer. In this the 
trade unions have, in a measure, helped to break down 

T 273 



ECONOMICS FOR HIGH SCHOOLS 

the old apprentice system. It is difficult for a man who 
desires to learn a trade to have any opportunity, unless 
he joins a union and learns under its direction. To a 
large extent this is to be deplored. 

There are minimum rates of wages, and all laborers 
must come within the boundaries of these fixed rates as 
agreed upon by union men. There is a tendency to level 
down, to suppress that individual effort which permits 
a man to rise above his fellows. Without intending it 
so, this leveling down is to the detriment of that which 
has been a means of the elevation of the English race, 
namely, individual responsibility. If a member of a union 
at any time does a little too much work, or is zealous 
to please his employer, they call him a bad name and 
say " he wants to rise above us," and then they turn his 
action into ridicule. This has a tendency to suppress 
honest, individual effort to rise above all surroundings, 
and without so desiring it, the union has a tendency to 
produce a dead level in society, discouraging progress. 
Wliile the general result is that of advancement in the 
trade unions, in this respect it is non-progressive. 

The recent struggle for the closed shop waged so strenu- 
ously by the labor organizations is an evidence of the 
arbitrary position labor has assumed in its attempt to 
dictate the industrial policy of the community. If indus- 
trial freedom is to be maintained, and justice to prevail, 
the open shop will be continued. 

The right to strike cannot be denied labor organiza- 
tions, any more than the right to organize, except it be 
the cause of a great injustice to a large number of indi- 
viduals of a community. But the trade unions have 

274 



LABOR ORGANIZATIONS 

greatly abused this power to strike; they have been inju- 
dicious, sometimes urged on by scheming leaders who 
have sought for prominence in the union, but more fre- 
quently urged on by the opinions of ignorant, stupid 
men, who have talked over their grievances until they 
have made mountains out of molehills. It may be said 
concerning evil, or injudicious leaders, that there is as 
much demagoguery and ambition for power within labor 
organizations, in proportion to the numbers, as in any 
political party in the United States. Human nature is 
the same here as elsewhere. Whereas the right to organ- 
ize may be claimed by any body of people in free coun- 
tries, and the right to strike for higher wages may also be 
accorded in a general way, nevertheless, it is true that this 
same position may be taken and held unjustly. Though 
the law may or may not decide in this way, it is the com- 
mon opinion that no small body of men has a right, under 
any circumstances, to discommode the whole economic 
world without being arraigned for injustice, by the com- 
mon opinion of right-thinking people. 

229. Result of Strikes. — We come to that important 
question, the result of strikes. Are strikes beneficial or 
detrimental to the interests of laborers? If we sum up 
the immediate gains in most strikes, it can be claimed 
that the larger majority of strikes are failures. And if 
we add to this the inconvenience caused to the community, 
the disorganization of trade, the loss to capital, it may be 
said directly that strikes fail. But if we consider the 
indirect influences of keeping up a common sentiment 
for higher wages, why, then possibly the victory has been 
with the labor movement; for in no other way can we 

27s 



ECONOMICS FOR HIGH SCHOOLS 

account for the great general improvement in the labor 
community and the increase of wages. 

It will be seen by looking over a list of the strikes that 
occurred during a period from January i, 1881, to June 
30, 1894, that where strikes were just, and laborers 
responsible for their demands, they usually succeeded. 
But where they were unjust and unreasonable and where, 
despite all that which legitimately fell to them, they tried 
to manage the employer's business, we may say they 
failed. During this period the total number of estab- 
lishments striking were 69,162. Of these, 21,580 were 
for the increase of wages; 10,543 for reduction of hours; 
and 5,564 against reduction of wages; and for both in- 
crease of wages and reduction of hours, 4,787. These 
are the four chief causes of strikes, although strikes for 
sympathy and for recognition of the unions are increasing. 
Of the total number of strikes, 44.49 per cent are reported 
as successful; 11.25 P^^ cent as partially successful; and 
44.23 per cent as failures. During this period, 3,712,561 
men were thrown out of employment on account of 
strikes; of these, 2,061,259 were on account of unsuc- 
cessful strikes. The loss in wages to employees was 
$163,807,657, and on account of lockouts for the same 
period, $26,685,516, or a total loss to employees of the 
enormous sum of $140,193,173. The loss to employers 
for the same period on' account of strikes and lockouts 
was $44,825,237. A large proportion of failures have 
been on account of the demands for change of time for 
beginning work, discharge of employees and foremen, 
discharge of non-union men, against the employment of 
non-union men, and for the reduction of the hours of 

276 



LABOR ORGANIZATIONS 

labor, and so on; while the large proportion of successes 
have been for an increase of wages and a reduction of 
hours. 

There seems to be a tendency for labor unions to be more 
and more conservative in respect to striking. They are 
learning by degrees what they may accomplish and what 
they may not, and while occasionally we see a disorderly 
strike in which there is no real cause or occasion, we more 
frequently see one that is advocated on account of some 
special grievance. A large proportion of the officers and 
leaders continually counseling infrequency of strikes, shows 
that there is a tendency, as intelligence increases, for people 
to be conservative. They recognize that there are limits 
to what they may do. 

230. Influence of Trade Unions on Wages. — In dis- 
cussing the laws of wages there are fixed what are called 
a superior and an inferior limit. The inferior limit repre- 
sents the lowest grade of wages, below which labor cannot 
perform the services demanded; the superior limit repre- 
sents a point above which, if wages rise, there will be no 
employment, and a large number of laborers thrown upon 
the market will tend to decrease wages. Of course it is 
well known that the rate of wages depends largely upon 
the law of supply and demand, but trade unions attempt 
to diminish the supply of regular laborers. This is one of 
the main points of the strike ; viz. to walk out and leave 
the employer without help. They attempt to fight one 
monopoly by creating another. Labor is not perfectly 
mobile; it competes in groups, one group with another 
group, and cannot be sufficiently detached for general 
competition. The result is that the unions can make a 

277 



ECONOMICS FOR HIGH SCHOOLS 

shortage in any given industry, and thus raise wages by 
destroying the equihbrium of supply and demand in any 
given occupation. But the plentifulness of labor in all 
occupations has been detrimental to their highest success 
in this respect. They also fail in another way. If the 
coal miners strike for higher wages, and thus enhance the 
price of coal, members of other unions must pay a higher 
price for coal, greatly to their detriment. Again, if railroad 
men strike, and thus hinder the delivery of raw materials 
or machinery that would employ another class, they too are 
thrown out of employment, and the result is that one part 
of the laboring community works against the interests of 
the other part. Upon this principle there is a general de- 
sire to make all labor one solid organization. But, owing 
to diversity of interests, which must first be overcome, this 
is a difficult matter. However, wages may be increased 
by the general operations of labor organizations. 

What do the laborers demand? They say, " We must 
have a larger share of the product of industry"; that, "As 
much can be produced in one hour now as in a day for- 
merly, but wages are not increased. We get little benefit 
of the increased facility of production." This is only a par- 
tial truth. The rate of wages is increasing, but not in pro- 
portion to the increased rapidity of production. Yet 
there is a limit to what a laborer may get. And the opera- 
tions of trade unions cannot force wages above a certain 
limit determined by the conditions of industry and labor. 
The laws of wages forbid this. 

231. Effectiveness of Labor Organizations. — Perhaps 
the economic services of labor organizations are best seen 
in the attempt to raise the standard of life and to create a 

278 



LABOR ORGANIZATIONS 

temporary monopoly, at least, for the supply of labor. 
In modern times they have sought to induce people to use 
only goods with union labels upon them, which are sup- 
posed to guarantee that they are made under the conditions 
of a high standard of life and well-paid labor. This has 
had a certain influence in producing a certain grade of 
goods and in preventing the use of sweat-made garments. 
In this respect they have had a stronger influence than the 
Consumers' League or any other agency for the purpose 
of encouraging well-paid labor. 

It is quite interesting to notice the growing power and 
influence of labor organizations. In England they are 
working on the basis of productive and distributive coopera- 
tion and the proper protection of laborers. The strike as 
a means of warfare is gradually dying out in England, al- 
though occasionally it breaks out with unprecedented fury, 
largely with the class of laborers who are less skilled and 
have not yet obtained their independence by right living. 
In America the strike has not yet been abandoned, but 
in most instances it is instigated by the more ignorant 
laborers. It is still, however, a powerful weapon in the 
settlement of the grievances of laboring people. Wher- 
ever the demands of laborers have been rational, they have 
in most instances succeeded, because they have had the 
support of the press and to a large extent that of the people. 
For every one who is interested in the welfare of the republic 
wishes to see a well-paid, industrious, intelligent, prosper- 
ous and happy body of laborers. 

232. Arbitration and Conciliation. — There is more and 
more a tendency to settle all labor difficulties by arbitration 
and conciliation. In the first place, they attempt to bring 

279 



ECONOMICS FOR HIGH SCHOOLS 

employer and employee together on the basis of agreement. 
It would be good economics as well as good politics if there 
were a board of arbitration in every state, which would sit 
first as a board of conciliation, trying to bring employer 
and employee together upon the basis of agreement; and 
second, if failing in this, to sit as a board of arbitration, 
with power to decide that if laborers do continue to work, 
it will be at a given wage within a limited time, and if 
employers go on with their business, they shall do so under 
the terms dictated. This is good politics, because two 
groups of people in a free country have no right to enter 
a quarrel which disturbs the peace and destroys the effect 
of the other men's toil, wasting their wealth and destroy- 
ing business. It is good economics, because every strike 
entails great losses both to employers and laborers. 
The employer's loss would be the margin on goods, the la- 
borer's in the form of wages. Under these circumstances, 
a board of arbitration would so influence both parties that 
they would adjust themselves to the conditions. Long- 
time agreements would be made, and rather than pass toj 
the state board of arbitration they would agree to settle all 
difficulties by a private board of arbitration made up of] 
laborers and employers. 

There is at present a considerable discussion as to thej 
relative desirability of compulsory and voluntary arbitra- 
tion. The former has been successfully tried in New Zea- 
land and the latter in England. Should voluntary ar- 
bitration become sufficiently universal, it is better than! 
compulsory. Yet the latter should be insisted upon when- 
ever the former fails to do its proper work; and as stated,] 
even in compulsory arbitration, voluntary agreements 

280 



LABOR ORGANIZATIONS 

should be encouraged, and compulsion used as a last re- 
sort. Nevertheless, arbitration of some sort, protecting 
the rights of both parties in the strife, is the most desirable 
and effective solution of the difficulty, because it is the nor- 
mal process in the evolution of law and social order. 

References. — Webb, Sidney, "History of Trade-Unionism"; 
Ely, R. T., "Labor Movements in America"; McNeil, "The Labor 
Movement"; Howell, "Conflict of Capital and Labor"; Wright, 
Carroll D., "Strikes and Lockouts"; Commons, J. S., "Trade- 
Unionism and Labor Problems"; Pratt, E. A., "Trade-Unionism 
and British Industry." 



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CHAPTER XXIV 

SOCIALISM AND ECONOMIC DISTRIBUTION 

233. The Claims of Socialism. — The socialists find 
fault with the present economic system on account of the 
waste of competition in production and the injustice of 
distribution. Recognizing, as every one does, the im- 
perfections of the modern methods of economics, they set 
forth in contrast an ideal system in which competition is 
destroyed and all economic society is arranged in groups, 
either states or smaller than states, which have complete 
control of industry. In this way they hope to abolish trusts, 
for the state would become one great trust which would 
order the amount and kind of production, establish each 
one's share of the natural product, and regulate all indus- 
trial, social, and educational affairs. They hold that this 
ideal system might be established at once if the people 
would but resolve to enter upon it. Believing in this 
system, they are opposed to the old method of political 
economy, and will listen to none of its teachings except 
those which advance their theories. As an economic 
system, socialism seeks to modify methods of production 
and distribution, but its chief aim is to reorganize distri- 
bution. 

Socialism has helped to point out the evils of modern 
economic society, and to that extent we recognize its ser- 

2 82 



SOCIALISM AND DISTRIBUTION 

vices; but it has failed in providing an adequate remedy 
for the evils that exist. In thus pointing out the evils of 
society and railing at the present constitution of things, 
socialists agree with the anarchists; but in their remedies 
these two groups of agitators disagree, for the anarchist 
desires no government, or the least possible, while the so- 
cialist desires the most possible. 

234. The Adjustments of Social Order. — Since man 
began to think at all about social life, reformers have not 
been wanting who have set forth ideal systems of social 
order. These reformers, earnestly seeking the improve- 
ment of human society, have been of widely different char- 
acter. There have been merely social writers, who have 
set forth a better standard of excellence in governmental 
affairs; there have been pure idealists, with impracticable 
plans ; and genuine social reformers, who have devised and 
executed plans for the improvement of the race. While the 
world has not been wanting in social reformers since the 
permanent organization of society, socialism as a system 
is modern in its origin. The Hebrews, Greeks, Romans, 
and Teutons, each had ideals of government, and each na- 
tionality had its ideal philosophers of social order. These 
nations all attempted to carry out practical methods of 
reform. Moses, Lycurgus, Solon, and Aristotle were re- 
formers of the better class. But the idealism of govern- 
ment found its first great apostle in Plato, who laid the 
foundation of modern socialism. 

Plato gave the world the first ideal system of politics 
based upon pure theory. In the full enthusiasm of youth, 
beholding the defects of the Grecian government, he wrote 
a book called the " RepubHc," in which he pictured man 

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ECONOMICS FOR HIGH SCHOOLS 

as living in a state of social perfection, — a state entirely 
different from that which existed in Greece in Plato's time. 
While Aristotle had based all his assumptions on 
the actual, the real, and the historical, Plato, in his 
" Republic," failed to do justice to historical reality. 
The " Republic " is a book grandly original in conception 
and beautiful in execution, but it advocated principles of 
government that have never yet been realized, and indeed 
which seem impossible to realize until society has vastly 
changed its condition. Its author held that the chief 
end of man was to perform his duty within the state; he 
was to be absorbed into the state. The highest good of 
man was sought in the suppression of the individual for 
the sake of social order. 

While Plato understood with the utmost clearness that 
the character of any state must depend upon the character 
of the individuals who compose it, and that a state could 
be no better than the citizens of which it is composed, yet, 
in his desire to carry out unity and symmetry under a par- 
ticular system, he ignored and suppressed the individual 
man. The picture which he presents to us is that of an 
ideal aristocracy, in which every part is complete and all 
its members labor in harmonious contentment. There 
are some extravagant ideas of common property, com- 
mon life, and community of family life ; yet the prime object 
of the whole is to insure righteousness, justice, and mo- 
rality. Without doubt Plato knew that he presented an 
ideal plan, and that he never expected to see a government 
such as he pictured in his " Republic" prevail in Greece 
until the character of Greek thought and Greek life had 
greatly changed from what it actually was in his time. 



SOCIALISM AND DISTRIBUTION 

Plato laid the foundation of modern socialism. Of the 
long line of idealists who have pictured to us what a perfect 
government ought to be, Plato stands at the head. And the 
numberless philosophic dreamers that have followed owe 
him a debt for setting forth principles of ideal systems of 
government beyond which none of them have ever trav- 
ersed very far. 

235. Thomas More. — Next to Plato, the man who was 
most successful in representing an ideal system which had 
great influence on the thought of his time and upon all 
Utopias since, was Sir Thomas More, who represented man 
as living in a perfect social state. Beholding the injustice 
and corruption of the government of England which had 
grown up under arbitrary power of kings and lords, he 
pictured an island government, different from that of 
England, in which peace, righteousness, and absolute jus- 
tice prevailed. This ideal nation numbered about three 
or four millions of people, living a simple life without pri- 
vate property. The officers, elected by the people, fixed 
the duration of labor, and settled what the labor should be. 
This disposed of the case of production. The question of 
the distribution of goods was left untouched, because, as 
he states, in a nation where wealth was abundant and jus- 
tice reigned, no one would desire more than his share of the 
property. He said it is fear of want that makes injustice, 
and if this could be disposed of, then justice and righteous- 
ness would reign. In regard to the social life, he modified 
the institution of marriage and the family very little. He 
held that the adoption of children would be largely prac- 
ticed, in order to keep families all very nearly equal in size. 
If excessive increase of population occurred, it was to be 

28s 



ECONOMICS FOR HIGH SCHOOLS 

dealt with by emigration. In this respect he went not so 
far as Plato, who taught that the state ought to take ex- 
clusive charge of the rearing of children upon a scientific 
basis, producing that kind which was most desirable in the 
community. This presentation of the ideal government 
by Sir Thomas More in his " Utopia " was a scathing criti- 
cism upon the English government of his time. It is 
hardly probable that More had any idea that his dream — 
this picture of what a government ought to be under a 
condition of perfect justice and righteousness in humanity 
— would ever be realized. It was one method of represent- 
ing the blackness and corruption of a wickedly and weakly 
governed people. But it stands to-day in history as the 
representation of the first well-presented system of pure 
communism. It is only a step or two from the Utopia of 
Sir Thomas More at the beginning of the sixteenth century 
to the development of French socialism in the middle of 
the eighteenth century, but over two centuries of time rolled 
away — centuries filled with changing events. 

236. Modem Cormnunism. — The first chief advocate 
of modern communism was Babeuf. He had been pre- 
ceded by Morellet, who, in his code of nature, taught that 
man by nature possessed every virtue and was only depraved 
by the influence of bad institutions, and that the worst of 
these bad institutions was that of private property. He 
held that the degradation of poverty, on the one side, and 
the enervation of riches, on the other, were two causes 
which kept men from being industrious. And he held that 
every person should contribute to the state according to his 
strength and wealth, and that in turn the state should sup- 
port him. Mably followed this writer, and held that the 

286 



SOCIALISM AND DISTRIBUTION 

establishment of property in land had been the great source 
of avarice, of ambition, and of vanity. 

While the French Revolution had for its war cry, 
" Equality and fraternity," Babeuf and his followers held 
that the only way to establish this equality and fraternity 
was to abolish private property and pass into a state of 
pure communism. Hence, in 1796, Babeuf organized his 
band of " equals," who wished to overthrow the state gov- 
ernment and reestablish it on a purely communistic basis. 
His theory concerning government was that the aim of 
society was the happiness of all, and that happiness con- 
sisted in equality, and that there was no way in which hap- 
piness could exist unless perfect and absolute equality 
reigned. He held that inharmony would prevail if a 
single individual in the world was richer or more powerful 
than his fellows. And Babeuf and his followers were ready 
to make any sacrifice whatever for the sake of this equality. 
They said : Let all the arts perish, if need be, provided we 
retain real equality. They held that nature had given to 
every man an equal right to the enjoyment of all goods ; yet 
they proposed to obtain this equality by coercion. A large 
national property might be obtained by seizing the prop- 
erty of corporations and public institutions, and this could 
he added to by gifts and by continued absorption until the 
government should own all the property and all the means 
of production. The people were to be divided into differ- 
ent groups of laborers, and each assigned to his particular 
group. All social conditions, save those relating to sex 
and age, were abolished. Equality having been gained 
universally, all must be dressed alike, all must eat the same 
quantity of the same kinds of foods ; and all must be edu- 

287 



ECONOMICS FOR HIGH SCHOOLS 



cated alike, and all education must be restricted to the 
elementary branches, that inequality might not continue 
to exist. Even the children were to be removed from the 
family at an early age and brought up together, in order 
that they might be trained in the principles of communism 
and educated on the basis of equality. The whole scheme 
seems dreary and monotonous enough. Everything was 
contrived to level the people down and not to elevate them, 
to bring the highest down to the plane of the stupid and 
self-contented of a lower order. 

237, Etienne Cabet. — From this dismal picture let us 
turn to Etienne Cabet, the son of a cooper, born in Dijon, 
France, 1788. A well-educated man, he practiced law for 
a while in his native city and subsequently in Paris, and 
finally became attorney-general for Corsica in 1830; but 
he lost his place in the following year, on account of his fierce 
opposition to the government. The remainder of his life 
was devoted to politics, literature, and communism. He 
wrote a popular history of the French Revolution, and pub- 
lished a journal in which he advocated moderate commu- 
nistic principles. For some of his utterances he was con- 
demned to two years' imprisonment. But escaping, he 
fled to London, where he became acquainted with Sir 
Thomas More's "Utopia," which made a deep impression 
on his mind. He returned to France in 1836 and pub- 
lished his book, entitled, " A Voyage to Icaria." In this 
he describes a country previously unknown, quite as large 
as France or England, but more populous and a thousand 
times more blessed. " Here crimes are unknown; It is a 
second promised land, an Eden, an elysium, a new ter- 
restrial paradise." The whole book was a philosophical 

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SOCIALISM AND DISTRIBUTION 

social romance, a dream of dreams. Cabet, who had many 
followers in France, was challenged to put his theories to 
the test, in answer to which he organized a colony for settle- 
ment in Texas. Failing to make a lodgement in this wilder- 
ness, the company passed up the Mississippi and settled 
at Nauvoo, in Illinois, a place which had recently been 
vacated by the Mormons. Subsequently he passed into 
Iowa, and founded the town of Icaria. Cabet returned to 
St. Louis, where he died in 1856. But the town of Icaria 
continues to exist to the present time, although in the year 
1899 it passed into the hands of a receiver for the sale and 
distribution of the property. Thus ends one of the most 
romantic and interesting attempts at communism known 
to history. The people of Icaria dwelt and toiled together 
many years, sowing their fields and harvesting crops which 
they put into a common granary. The men all dressed 
alike in blue duck suits; they went to market in blue 
wagons drawn by ox teams. They lived a rude, homely, 
peaceful life ; but the rising generation, stirred by thoughts 
of modern life, by a desire for progress and change, could 
no longer be held slaves to an ideal system. For how 
different was the rude picture of this slow-going community 
from the dream that had been presented ! It may be a 
noble thing for men and women to withdraw from the sharp 
competition of individual interests and combine themselves 
in an organization based on equality and brotherly love; 
it is a beautiful picture to see in our visions and dreams 
a group of people living in ease and elegance, happiness, 
peace, and perfect harmony: but how different from the 
cold, dreary, prosaic, monotonous life of the actual reality ! 
And this contrast, together with the desire to be men and 



ECONOMICS FOR HIGH SCHOOLS 

women, on the part of the younger members of the com- 
munity, to mingle freely with others in the pursuit of happi- 
ness, pleasure, and wealth, was sufhcient to cause the system 
to break down by its own weight. 

Cabet advocated a general transition to communism. 
He thought it would take fifty years for such a transition. 
Yet after fifty years of communistic success, the Icarian 
community disbanded; its property was sold at public 
sale and distributed among its members. Cabet says, 
" If we are asked what is our science, we reply, fraternity; 
our theory, fraternity; our system, fraternity." Cabet 
was the first and greatest pure communist of France, and 
Icaria the most ideal community ever in practice. 

238. Modern Socialism. — Saint-Simon was a socialist. 
He held that individuals should organize themselves into 
natural associations for the purpose of carrying on produc- 
tion and distribution. The communist believes in equality; 
the socialist in distributive justice. Saint-Simon held that 
men were naturally unequal, and that this inequality was 
the very basis of association and an indispensable condi- 
tion of social order. He and his followers, then, rejected 
the system of community of goods, for this would be a 
manifest violation of the doctrine which they taught; 
namely, that the purpose of all social institutions should 
be the moral and physical amelioration of the most numer- 
ous class; that all privileges of birth, without exception, 
should be abohshed, and that rewards should go to each 
according to his works. The followers of Saint-Simon 
were diligent in their efforts to improve the lot of the people 
and to relieve the distressed, but except in theory they ended 
in failure. 

290 



SOCIALISM AND DISTRIBUTION 

239. Fourier. — Fourier held doctrines similar to that 
of Saint-Simon. The principles advocated by the fol- 
lowers of Fourier were lofty, noble, and generous in the 
extreme. They held as the essential duty of society and of 
every individual to regulate their conduct so as to produce 
the greatest possible benefit to humanity, and to make this 
the consistent object of all their thoughts, words, and ac- 
tions. The perception of this duty was dictated to the sages 
of all times in the following precepts : To love truth as one's 
self, — to act toward others as you would wish them to act 
toward you, — to give a common support to one another, 
and the perpetual and gratuitous assistance from nature 
proves that man, by the very fact of his birth, carries and 
never should lose certain natural rights in the wealth that 
is produced; hence it follows that the weak have a right to 
enjoy what the processes of nature and the public prosperity 
place at the disposal of man, and that it is the duty of the 
strong to leave to the weak a just share of the general 
product. 

The influence of Fourierism was very great in America. 
Many prominent people, taking up the beautiful doctrine, 
tried to put it into practice on American soil. Among 
those who encouraged it were Horace Greeley, Charles 
A. Dana, Albert Brisbane, George Ripley, Dr. Chan- 
ning, and Margaret Fuller. Altogether, thirty-four ex- 
periments of Fourierism were made in America, all of 
which failed, or are to-day in a rapidly declining condition. 

240. State Socialism. — Louis Blanc was the first to 
join social and economic reform to politics; he was the 
first state socialist. Saint-Simon and Fourier were merely 
economic and social reformers. They were not poli- 

291 



ECONOMICS FOR HIGH SCHOOLS 

ticians or political organizers; they appealed simply to 
brotherly love and to justice, and sought to overthrow 
self-interest, Louis Blanc assumed, as his prime prin- 
ciple, the right of every man to labor, and he therefore 
held that the government should build workshops for the 
employment of the unemployed. Though of great influ- 
ence at the time, his career was short-lived. But it is 
strange to note how he impressed upon so many followers 
in so short a time the great importance and righteousness 
of his scheme. He found the aim of life to be happiness 
and development; happiness and development combined, 
he taught, can only be obtained when the state takes hold 
and regulates social industry. He says that fraternity 
means we are all common brothers of one great family, 
and that it is ordained by God himself that man should pro- 
duce according to his wants. This was his formula of 
perfection and justice, and to this end he thought the state 
ought to acquire public property by degrees, and after a 
long time it would grow into a state of perfect socialism. 
The whole plan rested upon distributive justice. It is 
true that there are places in the world that need large 
natures and fine intellect; there are likewise humble posi- 
tions which must be filled. It was a happy ideal that all 
people could labor together as one great family in the higher 
and lower degrees, and each one receive compensation 
according to the station which he filled. It was one more 
golden dream to be added to the category of the many 
which had philosophized about a paradise on earth. 

241. Anarchism. — • Proudhon followed Louis Blanc. 
He hated the rich, but he felt for the poor, and desired to 
bring about a social state which would be of great assist- 

292 



SOCIALISM AND DISTRIBUTION 

ance to them. He desired to level all organizing power 
and to develop perfect individuality. His theory was con- 
tradictory, for the supposition assumes that perfect collect- 
ivism and perfect individualism can exist at the same time. 
He startled the world by asking, "What is property?" 
and gave the more startling reply, " Property is theft, 
and property holders, thieves." Proudhon was an anar- 
chist. What was the ideal government in his eyes? No 
government. He desired absolute liberty. He rejected 
communism, but adhered to the prime principles of so- 
cialism, and held that property was the suicide of society. 
He was an earnest, sincere man; he loved the people, and 
sought to improve their condition. He said: " O God of 
liberty, may my memory perish if humanity may but be 
free ! If I may but see, in my obscurity, the people finally 
instructed, if noble instructors but enlighten them, if dis- 
interested hearts but guide them ! " This ideal anarchist 
philosophized government out of existence; the practical 
anarchist seeks to destroy by force. The one has a beau- 
tiful theory, the other proposes a horrible actuality. 

242. Recent Socialism. — Brief mention must be made 
of the German socialists represented by strong natures like 
Ferdinand Lassalle, Rodbertus, and Karl Marx, who have 
mingled the doctrines of economic life with politics and 
developed the social democracy of Germany. They have 
been, as a rule, closer students of human society and eco- 
nomic principles than the French; they have been more 
systematic, more analytic, but not less earnest in the ad- 
vance of their theories. They have laid great stress on the 
fact that labor is the source of all wealth, and that the pro- 
portion of goods falling to the laborer as production ad- 

293 



ECONOMICS FOR HIGH SCHOOLS 

vances is continually decreasing. There is space only to 
mention the recent German socialists, one branch of which 
is led by Bebel and the other by.Liebknecht, and the growth 
of social democracy in Germany. Worthy of mention are 
the influence of Robert Owen in England in the early part 
of this century in developing communistic cooperation, 
the later societies in England for the advancement of pure 
socialism, and the recent growth of the socialistic labor 
party. Recent English socialism represented by the Fa- 
bian Society varies in its nature somewhat from both the 
French and the German. 

243. Socialism in America. — Socialistic ideas of every 
description have been developing in the United States, 
yet there is lacking unity of purpose and solidity of organiza- 
tion. The works of such men as Bellamy, the great ad- 
vocate of state socialism, of Henry George, the advocate of 
nationalism in land, and of the Christian socialists that have 
sprung up in recent days, are all worthy of mention. 

No one can ignore the rapid growth of socialism in 
America, nor minimize the social tendency of this age. 
Such classes of persons, who not only insist on the govern- 
ment of monopolies, but also believe that the govern- 
ment should own all productive processes, are constantly 
increasing. They hold that the railroads and the tele- 
graphs, canals, and waterways, gas works and electric 
lights, farms, timber lands, mines, mills, factories, and stores 
— in fact, all industrial enterprises — should be under 
the immediate control of the government. This is pure 
socialism, and carried to its extreme limit abolishes the 
wage system and establishes an equitable method of dis- 
tribution. Others go so far as to advocate that all compe- 

294 



SOCIALISM AND DISTRIBUTION 

tition should be abolished, and that subsistence and sup- 
port be guaranteed without protest to every individual, 

244. Characteristics of Socialists. — The ranks of this 
army of idealists are recruited by people of widely differ- 
ent characters and conditions of life. There are those 
whose motives for a better life for all humanity are not to be 
impugned, any more than the motives of those who think 
that free competition, which gives a free and full play to 
humanity, will yield the highest and best return of human 
profit and happiness. They realize more clearly to-day 
than ever before the imperfections of human government, 
and present with greater earnestness the ideals of perfect 
society. The idealists are impressed more forcibly than 
ever before that a perfect society could be realized if the 
people only willed it. They are seeking the highest good 
of the greatest number, and are ready to sacrifice health 
and fortune for the advancement of these ends. Deceived 
they may be by the socialistic mirage, yet their earnestness 
and sincerity cannot be successfully denied. 

There are also found within this group of recruits to the 
army of socialism, people who represent the basest and 
most irritating forms of human selfishness. They desire 
state ownership of industries that they may receive more 
from the community than they are entitled to receive. 
They desire a new regime that they may be in a position 
to profit from the toil of others. It is the same sort of 
selfishness which prompts the individual to seek piratical 
freedom which will enable him to possess all that he can of 
this world's goods, by fair means or foul, regardless of the 
sufferings of others. The very selfishness of their own 
hearts makes them cry out against the selfishness of others. 

29S 



ECONOMICS FOR HIGH SCHOOLS 

The ranks of the sociahstic army are also daily recruited 
by people who started out fearlessly and honestly for a 
respectable position in social life, and having been de- 
feated in their combat are discouraged and despondent. 
When they find many others in the same condition as them- 
selves, they believe that there is something radically wrong 
in the nature of affairs when patience and honest endeavor 
fail to reap their just reward. They observe that part of 
the people are happy and prosperous, and a part, like them- 
selves, miserable and poverty-stricken. Victims of the 
teachings of the demagogues of the selfish class, they hastily 
conclude that this difference of condition is due to the 
unjust principles of social organization, and they turn 
instinctively to the state for the redress of grievances, believ- 
ing that it has the power to equalize conditions of life. 

245. Inadequacy of Socialism. — We observe, then, that 
there is nothing particularly new in this modern doc- 
trine of socialism; it has historical foundations. The 
socialism of to-day is founded upon the accumulated error 
of past philosophy and present practice. What are the 
defects of its philosophy, and what are the remedies for 
the evils which it points out ? Granting that many of the 
evils which these idealists have pointed out to us are real; 
granting that their beautiful theories and their optimistic 
plans have given us at times enthusiasm and warmed our 
hearts; acknowledging that they have had some influence 
over the philosophy of modem government and are having 
it to-day, — what are the defects of their system? 

The evils which the socialists have pointed out have been 
greatly exaggerated, and the times have been pictured to be 
much worse than they really are. Our industrial system 

ag6 



SOCIALISM AND DISTRIBUTION 

under present conditions is not an unmixed evil. The 
changes which it has wrought through invention and dis- 
covery, by working immediate injury to some, will work 
final benefit to all. The rapid movement of productive 
enterprise leads to much irregularity in the business world 
and gives rise to much distress; nevertheless, society is 
in a much better condition to-day than ever before; and if 
we consider the evolutionary process by which society de- 
velops, we shall find that justice and equality are more 
nearly approximated to-day than ever before. The search- 
light of modern investigation, coupled with the diffusion 
of learning, has enabled us to see things as they are. Con- 
sequently, we behold more clearly the nature of the evils 
which society has to combat. If we are faithful in search- 
ing out these evils, let us be faithful also in searching 
out and magnifying the excellences of modem economic 
and social life, and we shall see the advantages of our 
modem system. 

Again, even if the evils which the socialists portray were 
greater than they have been represented, there is no assur- 
ance that extreme socialism would remedy the defects of 
rank individualism. Socialists have been guilty of taking 
a partial diagnosis of the case, and consequently have pro- 
posed inadequate remedies. In their zeal to reach an 
economic millennium on earth, they have read history 
carelessly and superficially and have interpreted it falsely. 
They have selected from a few economists the principles 
which best suited their system, and with insufficient data 
have reasoned illogically. They have juggled with half 
knowledge, from which they have attempted to deduce 
general principles. Granting that the healthy and volun- 

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ECONOMICS FOR HIGH SCHOOLS 

tary cooperation of industrial classes is essential to all good 
economic progress, and granting, too, that there is a con- 
tinued tendency to monopolistic power in production as 
well as in distribution, they have failed to prove that it is 
necessary for the government to own and manage all re- 
sources of industry in order to secure to the people the bene- 
fits of this monopoly arising out of excessive free compe- 
tition. They have furnished no guaranty whatsoever, or 
even a strong probability, that socialism could regulate the 
disorders of economic life. 

Perhaps one of the weakest points in the system offered 
by the socialists arises from the fact that they offer no 
definite plan for the rapid transition from individualism 
to socialism. They simply state that it will be so, and 
expect people to accept the system. One of the most 
prominent socialists of the United States, in making an 
address a short time since, drew a fanciful picture showing 
how socialism would be accomplished within ten years, 
and how by that time all parties would be leaving the 
system of competition and rushing forward to adopt state 
socialism. He held that the time was at hand when the 
capitalist and monopolist would gladly free themselves 
from the present ruinous practice of free competition, and 
elect socialism. The plan of the transition, however, 
was left out, and the possible results of failure were never 
for a single instant considered. 

Again, socialism fails to account for the present con- 
dition of human nature as revealed by past history and 
present conditions. It has made no allowance for the 
continuance of the selfish greed of humanity. Socialism 
once established, will there not be an endless struggle 



SOCIALISM AND DISTRIBUTION 

for place and preferment, a struggle for supremacy, end- 
ing in excessive dominance of man over his fellows ? And 
will there not be a much larger opportunity for this domi- 
nance and selfish aggrandizement than there is now ? Have 
we any guaranty that human nature will be changed in the 
twinkling of an eye from hard, selfish, grasping impulse to 
that of noble, brave, and generous disposition which impels 
the individual to share all good with his fellows? Such 
an assumption is a vain delusion, a dream, and could only 
bring about political and social revolution combined, which 
would end in the spilling of blood in the struggle for daily 
bread, a revolution such as the world has never yet seen. 

The assumption that, because free competition in the 
industrial world has led to increased selfishness and arbi- 
trary dominance of certain ones who accumulate great 
wealth from others, and that if we could change the man- 
agement of all industries to the political power, namely, 
the state, we should be relieved from these evils, is en- 
tirely false; for it assumes that selfishness does not exist 
in political circles and is not manifested in the political 
affairs of the state. Every one knows that selfishness is 
more evident to-day in the common political life than in 
the industrial, and that selfishness occurs not only on 
the part of those already in power, but is just as prominent 
in those outside of power, who are waiting for an oppor- 
tunity to elevate themselves regardless of justice to others. 
The political conditions of the day are indeed far worse 
than the economic conditions, for the former consist in 
the replacement of one spoils system for another, while 
in the economic world we do see some potent signs of 
the progressive regulation of principles of justice and 

29-9 



ECONOMICS FOR HIGH SCHOOLS 

equality in the production and distribution of goods. To 
place everything under a political hierarchy means the 
concentration of selfishness and the removal of the last 
check, called competition, from the field of operation. 
To illustrate this fact, we need only to point to the dangers 
of concentrated selfishness in the political management 
of our large cities during the past fifty years. Here we see 
the enlarged power of human government in the hands 
of individuals struggling selfishly for the largest possible 
individual gain. We observe frequently the same ten- 
dency in the increased centralization of our national 
government. While in the smaller communities of local 
government, where less selfishness is concentrated, the 
will of the people is more nearly expressed. But the politi- 
cal dangers of socialism are entirely overlooked by the 
socialists. They have existed from the time when man 
first began to struggle with his fellows for subsistence. 

246. Socialism does not Insure Equality. — Another 
gross error into which the advocates of this system have 
fallen is based upon the teaching of the Gospel, which 
has been claimed by some as a powerful force in the de- 
velopment of socialism. But if the Master taught the 
common brotherhood of humanity and insisted upon 
justice and mercy, He also taught that man should not 
be comparing himself with his fellows as a criterion for 
correct life. But this age has become the age of individ- 
ual, and, it may be said, invidious comparisons, — the 
age in which we estimate our life and our prosperity by 
the lives and prosperity of others, instead of having in 
mind the ideal life, — and this has been extended more 
especially into the industrial world. Now the wage- 

300 



SOCIALISM AND DISTRIBUTION 

earner compares his shelter and his food, his opportunities 
for culture and learning, leisure and travel, with those of 
the millionaire, and he is soured and disgusted with the 
contrast. Humanity never got into a worse condition 
than this. The spirit of extreme individual comparisons 
leads to malice, envy, and crime. The assumption that 
with the state ownership of industries these contrasts 
would disappear is idle and chimerical. 

In the adjustment of social rights these facts must be 
regarded as fundamental to the great law of social prog- 
ress. There is not only a diversity of employment in 
the world, but a diversity of human capacities and charac- 
teristics ; indeed, the fundamental progress of the universe 
rests upon this variety of life. Under a socialistic system, 
some must be employed as officers of the state in great 
commercial enterprises, which means that others must 
do servile work, and in fact an entire gradation of em- 
ployments from the highest to the lowest must continue 
to exist. Is it to be supposed for an instant that where 
the spirit of comparison of the benefits of this life exists, 
which is born of selfishness and distrust, of ambition 
and avarice, we shall have any less inequality because 
of a sudden transition to state exploitation of all indus- 
tries ? Such an assumption is unwarranted and unfounded. 
Indeed, under the present status of human society, the most 
complete institutions and theoretically correct principles 
and methods are liable to abuse by men in power, and 
until the slow process of the regeneration of human nature 
reaches a higher state, until, step by step, the evil practices 
have been eliminated, we cannot count on any improved 
condition of humanity by a transition to socialistic usage. 

301 



ECONOMICS FOR HIGH SCHOOLS 

Those who earnestly advocate this doctrine have appar- 
ently failed to observe that the social misery of to-day is 
not wholly dependent upon capitalistic production, for 
the world at large is in better condition now than ever 
before. And if there has been a slow evolution of justice 
in capitalistic production during the past century, is it not 
fair to assume that it is better to continue in this slow 
process of development rather than venture suddenly 
upon an unknown sea without chart or compass, and no 
guide save the dreams of theorists, which have been 
accumulating for the past two thousand years? More- 
over, everybody admits the rapidity of production under 
the individual system. Apparently the socialists have 
failed to realize that there will be an immediate falling off 
in the production of economic goods the moment that 
state socialism prevails; and in view of the fact that 
socialism promises a large return to every man, how will 
this larger return be made possible? It is quite easy to 
see that a change from the present economic system to a 
socialistic regime would not eliminate the evils of economic 
society. It is quite difficult to apply the socialistic doc- 
trine to the practical affairs of life. At best, economic 
systems grow; they are not made to order, nor are they 
thrust aside at the behest of political government. 

247. No Formula for Reform. — Remedies for existing 
evils may not be discussed fully, but it may be suggested 
that more attention be given to character in proportion 
to intellect. The highest type of cooperative individual 
is dependent fully as much upon character as intellect. 
Among modern reformers too much stress has been placed 
upon mere intellect as causation in social evolution, and 

302 



SOCIALISM AND DISTRIBUTION 

too little upon character. Too much stress has also been 
laid upon the power of the general will to force social 
reform. Thousands of reformers crying in the market 
place that something ought to be done have brought 
on a condition of expectancy that something M^ould be 
done, and the individual has looked to the government, 
to society, to chance, and even to Providence for help, 
while his degenerate feet allowed him to slip into the 
great social residuum that exists on the borders of pauper- 
ism and crime. We need to teach and to learn individual 
responsibility, in the home, in the school, in the church, 
in the civil government. With it social responsibility 
will come as a natural sequence, for individual respon- 
sibility must include responsibility of education, power, 
and wealth, as well as the responsibility of self-preserva- 
tion. This can all be acquired under the present economic 
regime. The system may be modified, but it will not 
break down. 

The highest phases of culture and learning are accom- 
panied by the worst forms of degeneration; wealth and 
poverty, generosity and selfishness, justice and inhu- 
manity, virtue and vice, exist side by side. There is no 
patent cure for all our ills. When a man has a measure 
which he claims, if adopted by the government, will 
regenerate society, banish strife and selfishness, elimi- 
nate poverty and distress, cure pauperism and crime, one 
should regard it in the same light as the patent medicine 
which proposes to cure all bodily infirmities. Society 
cannot be cured by the direct application of nostrums. 
And it is evident to-day, as we look out at this great social 
struggle; as we observe the grinding of the millions in 

303 



ECONOMICS FOR HIGH SCHOOLS 

their ceaseless round of anxiety, strife, and care; as we 
see the inhumanity of man to man, the injustice, wretched- 
ness, and crime in the world, — indeed, as we behold all 
this, there is but one permanent cure, and that is educa- 
tion. The development of individual powers, individual 
life, individual culture, and the preparation of the indi- 
vidual for the active social duties of life, — this alone will 
preserve the present and insure the future. But, while 
we insist upon intellectual quickening, this must include 
the development of moral character, moral courage, and 
moral responsibility of the lives of others. We shall 
solve the problem of life by developing what is best in 
ourselves and in those with whom we come in contact. 
Out of this must come the regulating power that will 
eliminate selfishness and bring about justice in the exist- 
ing economic order. 

The prosperity of a nation rests upon the character of 
individuals. As Mr. Lecky well said, concerning the pros- 
perity of a nation, in his essay on the " Political Value of 
History": " Its foundation is laid in pure domestic life, 
in commercial integrity, in high standard of moral worth 
and of public spirit and simple habits, in courage, upright- 
ness, a certain soundness and moderation of judgment that 
springs quite as much from character as intellect." As these 
qualities and characteristics increase and predominate, the 
national life grows better; as they decline, it degenerates. 

References. T- Ely, R. T., "Socialism and Social Reform"; 
Ely, R. T., "French and German Socialism"; Bellamy, Edward, 
"Looking Backward"; Bellamy, Edward, "Equality"; Webb 
Sidney, and others, "Fabian Essays on SociaUsm "; SchaiBe 
"Quintessence of Socialism"; Flint, Robert, "Socialism." 

304 



PART IV 
VALUE, MONEY, AND EXCHANGE 

CHAPTER XXV 

UTILITY AND DEMAND 

248. Struggle for Wealth. — The object of wealth 
is to satisfy wants, and the ceaseless struggle for existence 
is simply a want-satisfying process. We exploit mines 
for the sake of iron to be used in buildings and imple- 
ments; for gold and silver to be made into money and 
ornaments; copper and lead and zinc for utility in the 
industrial arts; we till the soil to produce grains, fruits, 
and cattle for food; we exploit the forests to yield lumber 
for building purposes; and we use steam, water, elec- 
tricity, to propel great machines for the transformation 
of raw materials into articles of beauty and use. The 
more we have to work with and to live for, the more we 
want ; our desires are never satisfied. Increased wealth — 
that is, an increase of economic goods — gives us increased 
power, and we need larger wealth and more means to 
satisfy this power. 

249. Utility. — We desire these economic goods on 
account of their utility, and by utility we mean their 
want-satisfying power. Its only test is actual service. 

X 305 



ECONOMICS FOR HIGH SCHOOLS 

If a person wants an article, it is because it has an indi- 
vidual utility. If many want the same article, it has a 
social utility. The utility of goods is what brings them 
into market and disposes of them wherever they perform 
the greatest service, and thus goods are distributed among 
the people wherever they are demanded and in proportion 
to the demand. 

250. Demand Schedule. — If a single individual and 
a single commodity on the market are considered, it will 
be found that desire for goods diminishes as the supply 
increases. While there is an endless variety of wants, 
there is a limit to each separate want, and it diminishes 
with every increase in the amount of the thing which 
supplies it. There is in each separate case a diminishing 
utihty respecting every article. There is in the rational 
desires of every person a law of satiable desire. The 
total utility of an article or of a commodity on the market, 
which is the same as the total want-satisfying power, 
increases with every increment of person's stock in it; 
but it does not increase as fast as the stock increases. 
Thus, four horses will give a greater total utility than 
two, but the utility is not doubled by the purchase of the 
two additional horses. If the purchaser continues to 
add to his stock, each separate horse of the same grade 
will be valued less than the former, until he reaches a 
place at which he will not pay anything for a horse, but 
would keep him if given to him. The last increment 
which he is just induced to buy is called the marginal 
utility. Thus, the marginal utility of a quantity of any- 
thing diminishes with every increase in the amount 
which he already has. When two articles are com- 

306 



UTILITY AND DEMAND 

pared in this way, each individual constantly estimates 
the want-satisfying power of each article demanded. 

251. Law of Demand. — Each individual thus has his 
demand schedule for every article. Give an intelligent 
child a quarter and send him to a toy store and he will 
spend hours looking over various articles, estimating 
which will give him the largest amount of satisfaction 
for the money which he has to spend; for demand in this 
case, as in all other cases, represents the ability and willing- 
ness to pay a given price for any article offered in the market, 
and each individual will take an amount of any given article 
until the demand for that article is met by a greater demand 
for some other article. For example, if the value of hats 
falls, it may not affect every one, but will affect a few 
people at least, and the demand for hats will increase. A 
fall in the value of sugar will have a tendency to induce 
Mr. A to purchase more; a rise in the value will cut off 
his demand. Every decline in valuation on the market 
will be met with a larger sale, but the sale is not necessarily 
proportionate to this fall. There is not an exact ratio 
between a fall in prices and an increased demand. A fall 
of one tenth in price may increase the sales by only one 
eleventh, or it may increase them one fourth, or it may 
even double them. 

The law of increased demand may be stated as follows : 
A decrease in the supply, the demand remaining the same, 
will cause the prices to rise; an increase in the demand, 
the supply remaining constant, will cause prices to fall; 
an increase in the demand and a decrease in the supply 
will cause prices to rise rapidly; and in every case the 
demand and the supply tend to seek an equilibrium. 

307 



ECONOMICS FOR HIGH SCHOOLS 

252. Market Demand. — Other things being equal, the 
single demand of a person is a fair representative of 
the whole market. What one individual is doing in 
satisfying his wants, thousands are doing; and very often 
they want the same article at the same time. It is hardly 
fair to say that the average demand in a given market is 
the sum of the individual demands, but it is true that the 
greater the amount to be sold the smaller will be the price at 
which it will find purchasers ; and yet the universal demand 
for an article by many people increases the intensity of the 
desire and increases its value. 

253. Competition and Demand. — Competition goes 
on in never ceasing activity, tending to level the prices 
of all commodities of a similar nature. Each demand 
schedule is continually leveled or merged in the general 
market demand. There is also another competition 
going on in the market between articles of a different 
kind. If corn becomes high, people will use wheat, 
and vice versa. Thus, competition is observed every- 
where among substitute articles. When we measure 
men's desires and calculate the influence of each demand 
schedule for each separate article, we see that this method 
of substitution is universal, and that the appearance in the 
market of any commodity which can be used as a substitute 
for another already in use will lower the price of the latter. 

References. — See chapters XXVI and XXVII. 



308 



CHAPTER XXVI 

VALUE 

254. Definition. — Value is a relative term, which is 
applied to different articles to represent their degree of 
desirability. As it is the desire for economic goods which 
makes them valuable, and as utility represents the want- 
satisfying power of goods, value has been called the 
measure of utility; and in one sense this is true, for value 
always accompanies utility, although it is never identical 
with it. 

The various uses of the term " value " by economists, and 
the popular conception of the term, have led to great con- 
fusion. Even able writers have been often careless in 
its use. It is stated that at one time the celebrated Sydney 
Smith joined a club for the purpose of studying political 
economy. His sole purpose, as he stated, was to find 
out the use and true meaning of the word " value "; but 
after remaining in the club for some time he finally with- 
drew because, as he said, the club knew no more than he 
did. Owing to the controversy on this subject, it was 
with a sigh of relief that some economists welcomed the 
work of Stanley Jevons, which discarded the use of the 
term altogether. In the light of recent discussion, it 
seems very odd that John Stuart Mill should have written 
in 1848 that there remained nothing for him or any other 
writer to state concerning the laws of value. Since that 

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ECONOMICS FOR HIGH SCHOOLS 

time modem economists have accepted the loose usage 
of the word, giving it their own pecuhar meaning. Re- 
cently, however, the Austrian economists have reopened 
the subject, and given a clear and satisfactory analysis 
of value. This discussion has given evidence of the differ- 
ences of opinion on the subject. 

255. Differences of Opinion. — Much of the difficulty 
in modem discussion has arisen from misinterpretations 
of statements made by Adam Smith. In his " Wealth 
of Nations " (Bk. i, ch. IV.) he states: "The word value, 
it is to be observed, has two meanings, and sometimes 
expresses the utility of some particular object and some- 
times the power of purchasing other goods which the 
possession of that object conveys. The one may be called 
value in use and the other value in exchange. The things 
which have the greatest value in use have frequently 
little or no value in exchange; on the contrary, those 
which have the greatest value in exchange have little or 
no value in use. Nothing is more useful than water; 
it will purchase scarcely anything, scarce anything can be 
had in exchange for it. A diamond, on the contrary, has 
scarce any value in use, but a very great quantity of goods 
may frequently be had in exchange for it." While it 
was evidently not intended by the author to divide all 
values into two great independent comprehensive classes, 
he intended to point out two separate uses of the term. 
Perhaps his greatest error is found in his misconception 
of the term " utility." In an economic sense a diamond is 
very useful, because men desire it and use it, although 
water may be more beneficial. Whisky and beer are 
useful, although they may not be beneficial. Economic 

310 



VALUE 

value rests upon the use of articles, and the use depends 
upon their desirability. 

256. Free Goods and Economic Goods. — A discrimi- 
nation should be made between economic goods and what 
are termed free goods. Air and light are useful and 
beneficial, but they are provided in such great quantities 
and without any effort on the part of man that they are 
said to have no value. Water is sometimes classified in 
the same category, but its scarcity and its enlarged use 
in supplying cities and in irrigation have developed in 
it an economic quality. The only goods that we econo- 
mize, or about which we have economic care, are those 
which are just sufficient to supply our wants or insuf- 
ficient for that purpose; consequently, the free gifts of 
nature, which are bestowed in such abundance as to be 
in no sense objects of care to man, are said to be valueless. 
Hence it is, if no want is created, there is naught to be 
satisfied, and consequently there is no utility ; and if there 
is no utility, there can consequently be no value. 

257, Value an Index of Utility. — If utility is the want- 
satisfying power of goods, value is a sort of index, express- 
ive of the variations of utility. It is the valuometer 
which measures the intensity of desire. Hence it is that 
value changes with utility, increment by increment, and 
this value indicates the rise and fall of utility. However, 
the sum total of utility is not equivalent to the sum total 
of value, any more than the sum total of the readings of 
a thermometer during the day will measure the sum total 
of the heat in a given mass of water during the same 
period. Both utility and value are relative terms, and 
the changes in utility are recorded by the changes in value ; 

3" 



ECONOMICS FOR HIGH SCHOOLS 

nevertheless, the utility of the mass of a given good may 
increase, while the value of the mass may decline. This 
occurs from the fact that of any article in the market the 
value of the entire mass will be governed by the lowest 
valuation in the market. 

258. Theories of the Cause of Value. — There are many 
theories as to the cause of value. First are those which 
teach that labor is the cause of value, and that articles 
are valued in the market according to the labor it has 
taken to produce them. This theory was first propounded 
by Ricardo, and subsequently defended by Bastiat and 
Karl Marx. It is true that labor has much to do with 
the increase or decrease in the value of goods, but it 
cannot be taken as the primary origin of value. If this 
were true, that the value of an object is determined by 
the labor spent in its production, then it would follow that 
value would be unchangeable; on the contrary, we see 
that the values of articles constantly change. Machines 
and implements that cost excessive and long-continued 
labor are finally rendered valueless because they are no 
longer desired for service. The same idea is expressed 
in the exchange of articles in the market at the same 
price, which cost different amounts of labor. If labor 
were the cause of value, articles that cost the same amount 
of labor would exchange equally; and again, if labor 
were the cause of value, there would be no value without 
labor, — yet things which are of great value are found 
or discovered without any particular labor. But labor 
itself is valuable, and we could not estimate it if it were 
the sole cause of value in other things. It is evident that 
this theory, formerly accepted, is untenable. 

312 



VALUE 

Another theory is called " the difficulty-of-attainment 
theory." But it presents a condition of value, and not 
a cause. It hinders us from placing desirable goods 
upon the market, and thus makes a scarcity in the market 
and the value of the articles rises; that is, the demand 
remaining the same, the supply becomes deficient and 
values rise. But suppose no person wanted these goods, 
however difficult of attainment, they would be of no value. 

Closely allied to this is the scarcity theory. It simply 
asserts that because goods which are furnished us 
gratuitously and in abundance without labor have 
no value, other goods are valuable because they are 
scarce. It is true that if desirable goods become scarce, 
their value will be enhanced, but scarcity may not be 
called the primary cause of value. Frequently there are 
goods in the market, that are very scarce, but no one 
wants them and they have no value. 

259. Utility the Cause of Value. — The last group of 
theories to be mentioned is that of those who say that 
utility is the cause of value. Taking utility in the sense 
of satisfying wants, this is a correct theory, for it is the 
want-satisfying power of goods which makes them valu- 
able. This want-satisfying power and the demand remain- 
ing constant, goods will increase or decrease in value in 
accordance with their difficulty of attainment, just as 
they are scarce or plentiful in the market. As we desire 
goods very keenly, their value rises, and our desire is greatly 
increased if we find them insufficient for our wants; their 
quantity, moreover, is more or less insufficient in accord- 
ance with the ease or difficulty with which they are mul- 
tiplied. 

3.13 



ECONOMICS FOR HIGH SCHOOLS 

260. Objective and Subjective Value. — It is conven- 
ient to classify value into objective and subjective, for a 
better understanding of its nature. When we consider 
personal well-being, value is considered to be subjective; 
but when we consider some technical or mechanical 
result without any immediate reference to personal well- 
being, then we have objective value. The latter may 
again be divided into two divisions, — the first repre- 
sented by the amount of potential energy in material 
goods, and the second by the power of exchange. These 
represent the relation of potential energy and relative 
capacity between different articles. To illustrate, let us 
take the subject of coal. The subjective value of coal 
is determined by the amount of satisfaction I get in warm- 
ing myself before the fire. The objective value of coal 
will be the amount of power it creates through its heating 
capacity; and in the other objective sense, the amount 
of economic goods it will exchange for in the market. 
In economics we have nothing to do with the first two 
divisions of objective value. We may not consider the 
heating capacity of coal, the resisting power of different 
kinds of wood, the feeding power of com, nor the life- 
giving power of sunshine; we have to do with but one 
objective phase of value, and that is exchange value. 
The power — or capacity, if we may say this — of objects 
in exchange is economic value. 

It will be observed, however, that this phase of objective 
value rests upon personal or subjective value. In other 
words, exchange value rests upon men's desire for goods 
and their personal estimates of what goods are worth 
in the market. Thus will value, which represents power 

314 



VALUE 

or capacity in exchange, rest upon man's attempt to 
satisfy wants. Wherever there is a want to satisfy, there 
value arises. If a surplus occurs so that want is impossible, 
or if desire ceases on account of satiety, value declines and 
tends to pass out of existence. But wherever a want 
exists, — a lack of something, — there is an accompany- 
ing desire to find the thing needful. Therefore, both 
utility and value rest upon the basis of the wants of man. 
The degree to which wants are felt depends upon the 
extent of the supply needed before the point of satiety is 
reached, and also upon the common supply in relation 
to the need; consequently we must come to measure 
all wants relatively by the laws of supply and demand. 
By the demand for an object is meant the desire for it, 
accompanied by the willingness and ability to pay for 
it in goods, services, or money. 

261. Intrinsic Value. — The tendency in people to 
insist that the physical qualities of an object determine 
its value turns the whole matter into objective relations, 
for they are inclined to believe that objects carry with 
them some inherent quality that makes them valuable. 
So far as objects satisfy wants of man this is true, for 
it is the quality of goods that makes them desirable, and 
by quality we mean their capacity for service or pleasure, 
and this makes them desirable and hence valuable. The 
so-called intrinsic value of an article means nothing more 
than its capacity to satisfy desires. The intrinsic value 
of a hat is simply hat-service or hat-satisfaction; intrinsic 
value of money is its exchange value; intrinsic value of a 
gold watch is its service and beauty. The term is more 
frequently used in respect to money than in any other 

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ECONOMICS FOR HIGH SCHOOLS 

way. Thus gold and silver are said to have intrinsic 
value. For the purpose of exchange, the desire for a 
gold dollar is just the same as the desire for a paper dollar, 
for the two will perform the same service, — no more, 
no less. Hence it is that the intrinsic value of an article 
must rest upon desire alone, and that simply means that 
it is subjective. 

Now the real point at issue is that gold can be used 
for some other purpose than that of mere exchange. Its 
market is large and its demand is constant for a thousand 
purposes, while the paper dollar can be used for only one 
purpose, or possibly two, because the paper might be 
used in the manufacture of other paper; hence the intrinsic 
value of paper money is nothing, or very small, while 
the intrinsic value of gold, being universally desirable, 
is very large. We reach the conclusion, then, that all 
values in the ultimate must be traced to the subjective 
conditions. Primarily, gold, silver, lead, copper, iron, 
and tin will be valued according to their service and satis- 
faction, and of course their service and satisfaction 
will depend, secondarily, upon the qualities which they 
possess. 

References. — Smart, William, "Introduction to the Theory of 
Value"; Marshall, A., "Principles of Economics"; Commons, J. R., 
"Distribution"; Ely, R. T., "Outlines of Economics"; Wieser, Fred 
von, "Natural Value"; Seligman, E. R. A., "Principles of Eco- 
nomics." 



316 



CHAPTER XXVII 

PRICE AND THE MARKET 

262. Definition. — Price is the value of an article 
measured in the terms of money. As all commodities 
are measured in terms of one called money, a general 
rise in prices is indicated by a general fall in the value of 
the measuring unit. As all values are relative, there 
could not be a general rise or general fall of values, for 
if articles a, b, and c have their values represented by 
10, 20, and 30, it means that their ratios of value are 1,2, 
and 3. If, now, the value of each is doubled, they will 
become 20, 40, and 60, or if it is reduced 50 per cent, 
they will be 5, 10, and 15. In each case the ratio of i, 2, 
and 3 remains. There may be a rise or fall in the price 
of one or more articles in relation to other articles without 
any necessary change in the money value, but when all 
prices go up or down it is an indication that the values 
of the articles of the group have changed their relation 
to the measuring unit called money. 

263. Manner in which Market Price is Established. — 
We have already noted, in Chapters I. and II., the nature 
of subjective value and the individual-demand schedule. 
The marginal demand and the margmal utility are now 
understood, and the relation of marginal utility to value 
and price have been theoretically explained. It now 

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ECONOMICS FOR HIGH SCHOOLS 

remains to be determined how, from a practical stand- 
point, prices are established. Remembering that the 
law of supply and demand indicates an equilibrium, and 
that in individual cases the demand decreases with the 
lowering of the marginal utility, let us enter an ideal 
market, and by illustrations see what actually takes place 
between individuals. 

Suppose A wishes to sell a horse, the only one of its 
kind in the market, and B is the only purchaser. Suppose 
A's minimum price is $30 and B's maximum is $25, If 
the two parties hold to this, there will be no sale ; A would 
be willing to take $30 for the horse, but no less; B would 
be willing to pay $25 for the horse, but no more. There 
are other ways in which he would rather invest his money 
than pay a dollar more than $25; A knows no other way 
more to successfully invest his money than at the price, $30. 

Second proposition: Suppose A's minimum price is 
$30 and B's maximum price is $40. That is, rather 
than not get the horse, B would pay $40; rather than 
not sell, A would take $30. At first each man's proposi- 
tion is unknown to the other. A desires to get all he can 
for the horse; B wishes to purchase it at the smallest 
price possible. There will be a sale, the price being 
fixed between $30 and $40, according to the skill of the 
buyer or seller. This is a simple illustration of what is 
known as "the haggling of the market." As a third case, 
suppose A's minimum price is $30 and B's maximum 
price is $30; there will probably be a sale at that figure. 
It may happen that such a case actually occurs. 

Again, suppose there are three purchasers of horses, 
willing to give $30, $35, and $40, respectively, for the 

318 



PRICE AND THE MARKET 

horse, and there is only one horse of the kind in the market. 
Then A, B, and C bid for the horse. It is a case of compe- 
tition in buying, but not a competition in seUing. A 
ceases to bid above $30, B ceases to bid above $35, and 
the difference is settled between C and the seller. If C is a 
shrewd buyer, he will not pay much over $35, because he 
has discerned that the seller would be willing to take 
$30 rather than not sell. 

Suppose, now, there are three horses in the market and 
three purchasers, and that A will sell at $30 minimum, B at 
$35 minimum, C at $40 minimum. D will pay $35 maxi- 
mum, E $35 maximum, and F $40. Now if the three 
horses are similar and are sold in the open market, a fair 
price will be fixed for the horses. F does not propose to 
pay more than E or D. And D expects to pay as much as 
either E or F. The sale takes place. The price of the 
horses will be fixed between $30 and $40, and as D and E 
offer each $35, and' there is one horse offered at this price 
and one at less, the majority of buyers and sellers would 
indicate a price at $35 whether the horse is sold or not. 

This is an elementary case of buyers and sellers. If we 
enlarge this market, and have many buyers and many 
sellers, we shall have universal competition in buying and 
selling in the open market; and it is by this method that 
prices are finally fixed. Where a series of buyers and a 
series of sellers are competing, exchanges will take place 
where each individual sees a gain. Every individual will 
prefer a greater gain to a less, and the price is established 
somewhere between the minimum of the seller's subjective 
valuation and the buyer's maximum valuation, or betw^een 
the subjective valuation of the first successful and the first 

319 



ECONOMICS FOR HIGH SCHOOLS 

unsuccessful buyers where only competition takes place; 
or, in competition of many buyers and sellers, between the 
subjective valuations of the last buyer and the last seller. 
In this manner a market price is established for all bidders. 

264. Market Interferences. — In any market the supply 
of a given article is the amount offered at a given price, 
and it is different from the stock of the article on hand. 
This discrimination must be kept carefully in mind. The 
supply of an article always decreases with a decrease in 
price and increases with an increase in price. Now, a 
market is a place where prices are determined by competi- 
tion, and the market demand for an article is the amount 
that will be taken at any given price. It diminishes as 
the price increases. It is different from mere desire. It 
represents the willingness and ability to take a certain 
quantity of a given article at a given price. A mo- 
nopoly destroys the market, and principles laid down for 
the establishment of a market price can prevail only 
under free competition. Under our modern system of 
competitive trading, the price at which the demand is 
equal to the supply will be the market price of the 
article. 

Take, for instance, the example of cotton. Suppose it 
be selling at eight cents in the New York market. So long 
as the demand equals the supply, the price will remain at 
eight cents. If a large stock is thrown upon the market, 
the sellers will begin to fear that they cannot dispose of 
their stock, and will offer to sell for less. The buyers 
observe this, each strives to obtain it at a lower price, 
and so two groups of people, the " bulls" and the " bears," 
strive to fix on the market rate. In the Berlin Stock 

320 



PRICE AND THE MARKET 

Exchange the equalizing of the supply and demand and 
the fixing of a market rate is left to a commission. The 
committee settles upon the price which will secure the 
maximum number of transactions. In an ordinary mar- 
ket this settled price is fixed by the self-interest of groups 
of buyers and sellers acting under free competition and 
independently. There are interferences in the establish- 
ment of this market through corners of market valuations, 
and through custom by which prices are sometimes fixed 
for a long period of time, and finally through combi- 
nations of buyers and sellers in fixing the price. 

265. Normal Price. — The normal price of articles tends 
to approximate the cost of production. Through compe- 
tition, prices of staple commodities are proportionate to the 
cost of producing them. If the market price of an article 
is not sufficient to pay the cost of making, attention will be 
turned to other products, such as copper, lead, gold, silver, 
wheat, corn, etc. There is always a tendency, on the other 
hand, for high prices to be forced down by withdrawal 
of demand from high-priced articles wherever substitutes 
can be obtained. While temporary market prices are 
determined by traders, the fundamental basis of prices 
will be found in manufacturers, and we shall always find 
then two market centers, — the one the retail and the other 
the wholesale. 

The manner in which the normal price is established is 
through an equalizing process based partially upon the cost 
of production and on supply and demand, and the transi- 
tion from normal price to market price is generally a very 
clumsy process. In the first place, it is difficult to deter- 
mine the cost of production in any given line, for the 
y 321 



ECONOMICS FOR HIGH SCHOOLS 

expense varies and it is a question whether the average 
expense, the maximum expense, or the minimum expense 
should be noted. If there are several establishments 
producing the same line of goods, some of which are more 
favorably located than others, those more favorably located 
will be able to produce goods at a cheaper rate, and when 
the demand is limited, so that the more favorably located 
institutions produce all the goods necessary, these richer 
establishments will set the normal price; but when these 
more favorably located establishments are not able to fur- 
nish the entire output, the price will be set by the least 
favorably located in the entire number. Perhaps the aver- 
age expense will be estimated by taking, year in and year 
out, the entire product and averaging the price throughout 
the given period. 

At best, the relations between cost and price are obscure, 
on account of by-products. Thus, in the production of cot- 
ton we have cotton seed, which goes a long way toward the 
cost of production of the cotton; and in some instances 
coke, which is obtained in the manufacture of gas, receives 
such a favorable market as greatly to reduce the cost of the 
gas. There is a steadiness, however, to all manufacturing 
industries, hence there is a slowness of investment, for it 
is not easy to shift investment of property from one place to 
another. Manufacturing industries may enjoy a mo- 
nopoly for many years before competitors discover the 
real marginal profits. Railroads may enjoy monopolies 
for years though threatened with competition. Never- 
theless, with all interferences, there is a tendency in all 
prices to become normal in spite of legislation or combi- 
nation, and where we have normal prices the amounts 

322 



PRICE AND THE MARKET 

of production and consumption tend to equalize each 
other. 

266. Limitation of Prices. — In some instances prices 
are hmited by law, as in the case of the legal rates of gas 
established in Massachusetts, New York, and Maryland. 
By act of the legislatures of New York and Maryland, gas 
will not cost over $1.25 per thousand cubit feet. Monopoly 
cannot extend beyond this price. In former times it was 
an object of great controversy to determine what was a just 
price or a fair price. Many attempts have been made to 
limit prices by law, most of which have failed. The 
attempts to establish maximum freight rates have proved 
to a certain extent failures where they have tried to make 
these rates fixed. Where they have been placed in the 
hands of comm_issions, with the mandate of the law insist- 
ing only on reasonable rates being charged, something has 
been accomplished to regulate these rates. In many in- 
stances medical fees are limited by custom. 

References. — Commons, J. R., "Distribution of Wealth"; 
McFarlane, C. W., "Value, Price, and Distribution"; Hadley, 
A. T., "Economics"; Mill, J. S., "Principles." 

Note. — For illustration of value, price, utility, market price, etc., see 
Hadley's "Economics," Marshall's "Economics of Industry," and 
Blackmar's " Economics." 



323 



CHAPTER XXVIII 

MONEY 

267. Beginnings of Exchange. — When the division of 
labor came about, and each individual sought to perform 
certain services for himself which he could do better than 
others, he accumulated a surplus of goods which he ex- 
changed for others. That is, when he had more of a cer- 
tain line of goods than he actually needed, he exchanged 
those which he did not need for those which were more 
necessary to him. In this exchange he disposed of those 
goods of which he had an abundance for those of which he 
had a deficiency. In this way barter sprang up. 

268. Early History of Money. — Money was not de- 
vised by the thoughtfulness of any one brain, but came into 
being simply by use.' The practices of nations in primitive 
times, as well as in present times, reveal more clearly to us 
the nature of money; and the presentation of facts concern- 
ing these tends to show us how far our theories are correct 
and to be depended upon. 

Money came into use through the economic process of 
exchange. At first, one man produced all that he used, and 
exchanged nothing with his neighbor ; there was, of course, 
no need of money. But as time passed on and he traded 
his surplus products for surplus products of others, he 
entered into the field of barter. But, as exchange ex- 
tended and grew more complex, there came to be a certain 
■ 324 



MONEY 

commodity which measured the value of all other commodi- 
ties, and this we call money. This development of ex- 
change led to the use of different kinds of money. First, 
it might have been ornaments used as money. Finally 
the metals were used; first the low-grade metals and then 
the high-grade metals. 

The development of exchange led to the use of more 
and more valuable metals, and more and more valuable 
things to exchange. The accumulation of wealth led to the 
use of a higher and more valuable medium of exchange, 
the standard of measuring value. 

Thus it is that money in its different characters and 
capacities is, in one sense, an index of civilization. In 
primitive civilization, where the standard of living is low 
and where the accumulation of wealth is not great, we find 
a medium of exchange of very little value. Consequently 
the lower and baser metals, such as iron and copper, or 
ornaments, such as shells and beads, could be used as money 
among savage or barbarous tribes. Iron, copper, bronze, 
tin, and silver, each one in its turn, has been the chief 
medium of exchange of tribes and nations. But prior to 
the use of money, barter represents the earliest form of 
exchange. 

Barter is the exchange of commodity for commodity. 
Exchange itself has been called by Mr. Jevons, "the barter 
of the comparatively superfluous for the comparatively 
necessary," meaning, of course, that one man will trade 
those things in his possession which he desires for those 
things in the possession of others which he desires more, 
and which the others desire less. Consequently both par- 
ties are benefited by the barter. 

325 



ECONOMICS FOR HIGH SCHOOLS 

Barter may take on several different forms: as, the ex- 
change of commodity for commodities, such, for instance, 
as the trade of eggs for sugar; second, the exchange of 
commodities for services, as a day's labor for a sack of flour; 
third, the exchange of services for services, as in case where 
farmers exchange work in harvesting grain. Such are the 
formulas for barter. To a certain extent we find rem- 
nants of these ancient forms in modern trade, and they 
tell us of the day when there were no other methods of 
exchange than these. 

There are indeed many difficulties and inconveniences 
in barter, and the chief difficulty of it is that there must 
be valuation of the bartered article in terms of every 
other article in the market. So that for the exchange of 
one hundred articles there may be four thousand five hun- 
dred and ninety separate measures of value. Thus the 
hat must be measured in terms of the coat, and the coat 
in terms of potatoes and corn and flour, and so on. 
Another instance of the difiEiculty of barter is the indi- 
visibility of articles. A tailor has a coat which he has 
made, with which he desires to buy groceries and hard- 
ware; doubtless he gets the articles which he needs from 
several different persons, but the coat cannot be well 
divided; consequently he cannot trade with several dif- 
ferent persons until he can find some opportunity for 
exchange. 

So, also, of the payment for services: the person who 
works a day or a week or a month must be able to obtain 
in pay the articles which he desires, but as soon as he gets 
them he must look around for some one to take them in 
exchange for goods which he wishes. And again, it is a 

326 



MONEY 

cumbersome method of exchange; a process which would 
apply to a slowly moving community, a slowly developing 
civilization, a people in whom is found no progress; and 
that is one reason why the kind or class of coin used 
represents the rapidity of progress of a nation. 

As has been stated, the complexity of trade leads to the 
primitive use of money. Thus primitive money was gen- 
erally some well-known commodity, something that was 
universally produced and universally admired within the 
limits of the tribe or tribes among which it circulated. 
Worthless things are not usually chosen as money. In 
the natural history of its development, doubtless in very 
early times, things that we might call worthless, such as 
articles of personal adornment, were used as money; 
but they satisfied human desire, and that is what makes 
things valuable. Value rests not on the thing itself, but in 
its capacity to satisfy human wants. Value is more sub- 
jective than objective. Thus in the hunter-fisher stage we 
find peltry and other productions of the chase were used as 
money. In this rude state of civilization the products of the 
chase would be the natural measures of value, on account 
of their permanent value caused by their universal desir- 
ability as clothing. Hence the skins of animals became one 
of the earliest forms of currency. Not only the Oriental 
nations, but the northern nations of Europe, as well as the 
American Indians, have used skins and furs of animals as 
rude currency. In this respect the early history of the Hud- 
son Bay Company with the North American Indians is ex- 
ceedingly interesting. The different furs or skins of animals 
were represented at different prices, and they bought flour 
with the beaver skin and the marten skin. One beaver 

327 



ECONOMICS FOR HIGH SCHOOLS 

skin was supposed to be worth two shillings and it repre- 
sented two martens, and so on; and these skins were ex- 
changed for clothing and food according to their real value. 

If we advance one step higher in civilization and come 
to the currency of the pastoral age, we shall find that sheep 
and cattle formed the chief money of the peoples. Even 
among the ancient Greeks we find the payment in oxen 
rather than in coin. 

Our word " fee " has an interesting history: it comes 
from the Anglo-Saxon " feoh," which means both money 
and cattle, or a kind of treasure, so that the cattle were 
in this period the medium of exchange. Likewise, slaves 
were used in the same period, exchanged for goods, and 
bought and sold as a measure of value. In both of these 
periods we find the articles of adornment being used for 
money; shells and beads and trinkets which were con- 
sidered valuable and which were universally known 
were among the media of exchange. There was a par- 
ticular kind of beads made of the ends of black and white 
shells rubbed down and polished, and these were called 
wampum. This was so well established as currency among 
the Indians that the court of Massachusetts in 1649 ^^~ 
dered that it be received in payments of debts among the 
settlers to the amount of forty shillings. Rich Indian 
chiefs hoarded the wampum even as misers hoard gold and 
silver. 

In the agricultural stage we find a great change; corn 
became, in the European states, a measure of value, and in 
Norway it is related that it was even deposited in banks 
and loaned and borrowed. It is a great advantage over 
articles, in that it is easily divisible even to a grain. It is 

328 



MONEY 

known that grains in Central America were formerly cir- 
culated as money. So, too, in America, in the colonies, 
tobacco, beans, tar, wheat, and other articles were not only 
used in circulation, but made legal tender by law for the 
payment of all debts and obligations. In 1 6 1 8 the governor 
of Virginia ordered that tobacco be received at the rate of 
three shillings for a pound- weight, and the penalty for refus- 
ing so to receive it was three years' hard labor; thus it was 
made legal tender. And we are told that when the Vir- 
ginia Company imported young women as wives for the 
settlers, the price per head was one hundred pounds of 
tobacco, which was subsequently raised to one hundred 
and fifty pounds on account of the scarcity or superior 
quality of the goods. 

As late as 1732 the legislature of Maryland made to- 
bacco and Indian corn legal tenders. And so we find that 
land was bought with tobacco; groceries and provisions 
made with tobacco ; and the foundations of lotteries made 
on the basis of tobacco. So South Carolina, in 1687, made 
corn, peas, pork, beef, tobacco, and tar legal tender. 
In an early day in Oregon, wheat was made a legal tender 
for the payment of taxes and debts. Cows were made 
legal tender for taxes in Massachusetts colony, and the 
poorest cow was always given for taxes. 

The use of metals, particularly gold and silver, repre- 
sented a great step in the advance of commerce. We 
find, too, that the lower and baser metals were used first 
as the principal means of coinage, but were generally re- 
placed by gold and silver as the chief measures of value. 
It is difficult to determine just when the use of gold and 
silver began; without doubt they were first used as orna- 

329 



ECONOMICS FOR HIGH SCHOOLS 

ments on account of their brilliancy, and perhaps their 
supposed value. They were long desirable before they were 
used as money. Indeed, in their earlier period they were 
doubtless too scarce and too much prized to be used in 
common circulation. 

Although bronze and tin had been used to a considerable 
extent, copper was the first metal to be used and this was 
gradually replaced by silver and gold. Iron was used 
in very early days in the form of small spikes, which were 
exchanged somewhat similar to the bars of iron which 
are now used in trading with the Indians of Central Amer- 
ica. And not long ago, iron money was in use in Japan 
for small values. 

Lead, too, has often been used as currency, — it is men- 
tioned by the Greek and Latin poets; and once, in 1636, 
bullets were used as an exchange in Massachusetts. Lead 
is now currency in Burmah, being passed by weight for 
small payments. 

Tin, obtained in Cornwall, was used at an early date. 
Doubtless the first coin of Britain was composed of tin. 
England frequently coined tin; in 1680 tin farthings were 
struck by Charles II, a stud of copper being inserted in 
the middle to render counterfeiting more difficult. 

Since the first introduction of the art of coinage, silver 
has been coined and highly prized for its fine, pure white 
luster, its peculiar qualities making it desirable for money; 
and the valuation put upon it for use in the arts has ren- 
dered silver one of the most suitable and valuable metals 
for the measurement of values. Its value has remained 
more stable for long periods of time than any other metal. 
And one reason, as we shall learn, is the steady, even pro- 
) 330 



MONEY 

duction of silver, and the great stock of it used in plate 
and ornaments. 

But gold has been recognized as the king of metals be- 
cause of its great desirability due to its peculiar qualities, 
brightness, malleability, and absolute purity. And these, 
more than anything else, have tended to render gold sought 
for by all nations of all times ; and this desire, coupled with 
legislation, has made gold exceedingly valuable, so that it 
has always ranged more valuable than silver from the 
earliest times. Other metals have been used as money, 
such as platinum, coined in 1825 and 1845 ^^ Russia, 
and afterwards abandoned because it was unfit for currency, 
being too difficult to coin and too scarce. Nickel also has 
been used to a considerable extent. There is a tendency 
in the use of all metals to use the highest grades for the 
measure of value for large transactions, and to use the 
cheaper metals for subsidiary coin and for small transac- 
tions. 

269. Kinds of Money. — It is convenient to divide money 
into various kinds according to its services. Ely has 
divided it into Popular money. Legal money. Economic 
money. Popular money is that which is accepted by 
the people regardless of economic or legal conditions. 
Popular money is best exemplified in the definition of 
Walker: — 

" That which freely passes from hand to hand through- 
out the community in final discharge of debts and in full 
payments of commodities; being accepted equally without 
reference to the character or credit of the person who offers 
it, and without the intention of the person who receives it 
to consume it or enjoy it or apply it to any other use than in 

331 



ECONOMICS FOR HIGH SCHOOLS 

turn to tender it to others in discharge of debts, or in pay- 
ment of commodities." 

Any article which will perform these services may be 
called money, whether it be made of paper, gold, silver, 
or lead. 

Legal money is that which is used by law, and has refer- 
ence to legal- tender goods with reference to money. Any- 
thing that is established by law as money is a legal tender 
good. Legal-tender money is not always popular; thus 
the treasury note, or " Greenback," has been unpopular at 
times. In the time of the war, in California, people refused 
to accept it, and the result was that it did not circulate. 
Frequently, coins become unpopular and the government is 
obliged to recoin them. Again, on the contrary, the national 
bank note of the United States is not legal tender, and yet is 
among the most popular forms of money we have at present. 

Economic money fulfills the following conditions: It 
must serve as a measure of value and a medium of ex- 
change. In order to be a medium of exchange it must be 
popular, and to a certain extent be legal tender. It must 
be the means of making deferred payments, and also it 
must be a storage of value. In most instances money must 
be also legal tender; but the best money will include all 
of these functions. It must be popular, being readily re- 
ceived; it should be legal tender, to answer all require- 
ments of the law; finally, it ought to be economic in ful- 
filling the above conditions. 

270. Functions of Money. — The principal functions of 
money are those enumerated above: namely, a medium 
of exchange, measure of value, means of deferred pay- 

332 



MONEY 

ments, and storage of value. Money as a medium of 
exchange is the most popular conception. In this, 
money becomes an instrument by which exchanges are 
brought about. It comes from the expression of value 
of two articles in the market in terms of one article 
which is, in primitive society at least, the one most com- 
monly recognized. Whatever money is most convenient 
for exchange, other things being equal, is the best money. 

271. Measures of Value. ^ Money measures value be- 
cause it has value, and only the substances which have value 
can be used as money. Length measures length, weight 
measures weight, and value measures value. All measures 
are merely comparisons. When we say a table is two 
yards long, we express a comparison. The length of the 
table is to the length of a known measure, called a yard, as 
two is to one. When we say an article weighs four pounds, 
we say the weight of the article is to the weight of a known 
article, called a pound, as four is to one. When we say 
the value of an article is $4, we simply imply that the value 
of the article is to the value of a known unit, called a dollar, 
as four is to one. All money in exchange is a measure of 
value. It matters not what the money is, the exchange im- 
plies a comparison and a measure; and whether it be paper 
or gold, if it performs its money function, it is entitled to the 
term "money." 

272. Standard of Value. — We should distinguish the 
standard of value from the measure of value. While all 
money might be a measure of value, not all money is a 
standard of value. Back of all moneys is one to which all 
are referred as a standard. To understand this, we should 
observe what kind of standard of measurement we have in 

333 



ECONOMICS FOR HIGH SCHOOLS 

regard to length. There are a large number of yardsticks 
in every community. Every one is a measure of length; 
but some may be longer or shorter than others, still they 
are measures of length. There is, however, a government 
standard of length, to which all other yardsticks are re- 
ferred. This yardstick is the standard of length, based 
upon the vibrations of a pendulum. The same principle 
is to be observed in regard to measure by weight. There 
may be several scales in the community, each measuring 
weight, although they may vary, yet there is one standard 
to which all may be referred for adjustment. This is the 
standard of weight of the government, which must be 
absolutely correct. So, whether we have bank notes, silver 
certificates, gold certificates, or silver money, they are all 
referred to gold as a standard of value. 

273. Deferred Payments. — In modern life many occa- 
sions arise for contracts extending over periods of time of 
greater or less duration. When exchanges take place on the 
market, usually there is no consideration of time; in time 
contracts, however, this is a very important consideration. 
It is evident that did money fluctuate in quantity or in value 
as much as do many commodities on the market, there 
would be a great element of risk introduced into these time 
contracts, often causing heavy financial loss to one or the 
other of the parties concerned. Great demoralization of 
trade would be the result. Trade would not increase as 
freely and as rapidly as it would otherwise, and possibly 
there would be even a shrinkage in times of more than usual 
fluctuation of the measuring unit. Hence it is that 
money, which by its nature and use becomes the standard 
of deferred payments, must be of as stable a character as 

334 



MONEY 

possible. The precious metals, gold and silver, have been 
found to vary much less than probably any other known 
commodity, and on that account are peculiarly suited for 
use as money. Even here, however, some fluctuation 
occurs. To obviate the harm arising from these variations, 
different standards have been devised, but none of them 
have ever received more than a tentative application. 

274. Multiple Standard. — One of the suggested means 
for avoiding any change in the standard of value is what is 
known as the Multiple Standard. The term refers to a 
standard composed of or based on a number of articles 
instead of one. Thus, a gold standard is based on simply 
the one article, gold. A bimetallic standard is a multiple 
standard, for with it two metals are used upon which to base 
the money standard. What is known as a tabular standard 
is simply a variation of the principle of the multiple stand- 
ard. According to the exemplification of this method as 
given by Jevons, the present monetary systems would be 
retained under the tabular standard, but they would cease 
to be standards for deferred payments. Instead, a number 
of staple commodities would be continually compared in 
their relations with the monetary standard, and all settle- 
ments would be made in money, but on the basis of the 
tabular standard. That is, to quote Mr. Jevons: " Sup- 
pose that a debt of $100 was incurred upon the ist of July, 
1875, and was to be paid back on the ist of July, 1878; if 
. . . the value of gold had fallen in the relation of 106 to 
100 in the intervening years, then the creditor would claim 
an increase of 6 per cent in the nominal amount of the debt, 
and vice versa." 

275. Storage of Value. — Another of the functions of 

335 



ECONOMICS FOR HIGH SCHOOLS 

money already mentioned is that of storage of value. The 
necessity for this qualification in good money arises from 
the fact that were an article good to-day and not good to- 
morrow it would be received in trade with considerable 
hesitation; no one would be willing to receive it unless he 
expected to be able to dispose of it before it lost its value. 
Such a lack of stability and permanence of value would be 
fatal to the adaptability of such an article as money. 
When a person disposes in trade of goods in his possession, 
he may not desire to invest immediately the proceeds of 
this trade. Hence he wishes to receive in payment for 
his goods a money that will not shrink in value during the 
period that he retains it uninvested. In other words, he 
desires to receive in exchange for his goods something in 
which the value of the goods he formerly owned can re- 
main stored until he is ready to use it again. Con- 
venience in storage demands that as little space as 
possible be occupied by the article in which the value is 
stored. Gold and silver, because of the great value 
possessed by relatively small quantities, are excellent 
commodities for the storage of value and hence especially 
fitted to be used. 

276. Principles of Circulation. — The purchasing value 
of money depends upon its demand and supply, and not 
upon its cost of production. The consideration that gov- 
erns in fixing the price of an article in exchange is not, 
How much did it cost you ? but. What is it worth to me ? 
Of course its cost to the producer will influence his willing- 
ness to part with it, up to the point where he receives more 
for it than it cost. The demands of exchange for money 
will depend upon the amount of business being done, and 

33^ 



MONEY 

hence the value of money will naturally be dependent upon 
its supply and the amount of business being carried on. 
Should the supply of money be insufficient to complete 
exchanges, money will be dear; that is, it will purchase a 
large amount of commodities, or prices will be low. Should 
prices continue falling, — that is, money be continually 
growing dearer, — it is evident that the debtor class will be 
at a disadvantage; their debts, reckoned in commodities, 
will be steadily increasing and will be oppressive. On the 
other hand, an extremely cheap money, by greatly raising 
prices, will overstimulate trade and lead to speculation. 
This is one of the almost inevitable evils of currency in- 
flation. A condition midway between these two extremes 
is the one most sought after by financiers. A money that 
just turns to the side of cheapness without being cheap 
will give a gentle and consequently healthy stimulus to 
trade. 

A sudden increase in the value of money, such as would 
be brought about by a contraction in its volume, would 
lower prices from the mere fact that there would be less 
money with which to carry on exchanges, and hence more 
goods would have to exchange for the same amount of 
money. But if we multiply money beyond the point of 
saturation, the amount needed to carry on exchanges in the 
most perfect manner, its individual purchasing power will 
shrink, prices will rise. The method by which money gets 
into circulation is sometimes detrimental to its best use, 
from the fact that it may interfere with normal circulation. 
The act of its introduction has a tendency to disturb the 
equilibrium of money, but this disturbance is not great nor 
serious. Also, the irregularities of circulation demand a 

z .337 



ECONOMICS FOR HIGH SCHOOLS 

considerably larger amount of money than would be 
necessary were the circulation more constant. Large 
amounts of money are hoarded or laid away for long pe- 
riods and must be replaced by other, else trade will suffer 
from shrinkage in the money volume. Again, when the 
population covers a large territory and industries are 
diversified, more money is needed at different seasons of 
the year in different sections. 

277. Amount of Money needed by a Nation. — To de- 
termine the amount of money needed by any country, 
it is necessary to consider many secondary matters. Of 
course the amount of money needed will tend to increase 
with the population. Aside from the amount of the popu- 
lation, however, the amount of money needed will be less 
for a dense population than for the same population scat- 
tered widely over considerably more territory, for in the 
latter case the rapidity of circulation will be diminished. 
This rapidity of circulation is a very important factor. 
A country in which savings are promptly banked, and are 
passed again quickly into the circulation, or where money 
is otherwise kept in constant and rapid circulation, will 
need less money to carry on the same amount of business 
than one in which money is hoarded and circulates but 
sluggishly; for it is obvious that if money pass rapidly 
from hand to hand it will accomplish many more trans- 
actions than if it is kept for a long time inactive. Where 
much business is being transacted, more money is of course 
needed. This brings about a condition contrary to the 
common belief; namely, that if commerce be increased, 
prices will fall, because of the great need of money, unless 
the volume should be increased to keep apace with the 

338 



MONEY 

increase of business. The kind of money to fulfill these 
conditions is one that is freely convertible, full legal tender, 
and convenient for a free and rapid circulation. A money 
that passes freely in but a part of the country will disar- 
range the conditions for calculating the amount of money 
needed to accommodate the whole country. 

278, Monometallism. — Monometallism is a term applied 
to the use of a single metal as standard money. There have 
been instances of the use of different metals as the standard 
money under a monometallic standard, but gold is the 
metal generally employed for a single standard. With this 
system other metals are commonly used for token or sub- 
sidiary coins. In accordance with a preceding paragraph 
on the standard of value, it is impossible to use more 
than one metal at a given time as a standard of value. It is 
possible, however, to use two or more metals as measures 
of value, although one will eventually become a standard 
and others will be subsidiary money. Monometallism rec- 
ognizes but one standard. 

279. Bimetallism. — Bimetallism, as opposed to mono- 
metallism, is the system under which two metals are used 
for the coinage of standard money, either of them being a 
lawful standard money. Any two metals might be used for 
standard money under the term "bimetallism," — a good 
many have been used; but gold and silver are the two that 
commonly are used, and are those meant when bimetallism 
is referred to. With a bimetallic standard gold and silver 
are coined into standard money, exclusive of subsidiary 
coins that may be made from either of these or from other 
metals. When this system is employed, a legal ratio is 
fixed at which the two metals are to be coined, and this 

339 



ECONOMICS FOR HIGH SCHOOLS 

ratio should be permanent. Bimetallism is the free and 
unlimited coinage of gold and silver under the same regula- 
tions, at a fixed ratio of value. The irregular fluctuation 
of the two metals causes the market value of the metals to 
vary, consequently the market ratio departs from the legal 
ratio. Soon the value of one metal is measured in terms 
of the other. 

280. Paper Money. — Paper money may be of many 
kinds. It may be in the form of bank notes ; of certificates 
representing gold or silver deposited to their face value; of 
certificates representing certain forms of property, such as 
land, as in the case of the French assignats ; of government 
promises to pay; or it may be simply fiat money, or paper 
money without security of any kind, circulating merely on 
the government enactment of legal-tender properties. The 
greatest danger connected with the issue of paper money is 
inflation, with its consequent evils. After one issue of paper v 
money, others follow easily, and generally end in a commer- 
cial breakdown and great distress. The issue of fiat money 
has been admitted by some economists to be theoretically 
sound, but uncontrollable in practice, and hence danger- 
ous. To be safe, paper money should always be limited 
in issue, and immediately convertible. This is generally 
the case with gold and silver certificates and bank notes. 

281. Paper Money and Bank Notes. — ^The amount 
of issue of bank notes is generally regulated by law, and 
since the profit resulting from circulation does not fall 
to the government, their issue is much more carefully 
restricted than are the issues of paper money from which 
the profit accrues to the government. They are generally 
secured by deposits, property, or bonds. Bank notes 

340 



MONEY 

form an elastic kind of circulation, as they will be issued 
according to the demand for money. Gold and silver 
certificates, on the other hand, are not elastic. Govern- 
ment notes and fiat money may be elastic in their issue, 
but as they may not be readily recalled they are unsafe. 

282, Monetary History of the United States. — In the 
earliest history of American civilization, the money used 
was the money of European countries. At times this 
was inadequate to perform the necessary exchanges, and 
acts were passed by the different colonial legislatures 
authorizing the use of tobacco, beans, tar, wheat, and 
even wampum as a legal tender. A little later there 
was a certain amount of subsidiary coinage carried on 
by the colonies. But the most important currency action 
taken by the early American colonies was the issue of 
paper money that was floated by banks and by the colo- 
nial governments. Probably the most noted instance of 
the issue of paper money by the colonial governments 
was that by Rhode Island, where issue after Issue of depre- 
ciated paper money was poured out upon the people. 
It all fell rapidly In value, and frequently caused great 
hardship and distress. The continental currency was 
the next attempt of the American people to issue paper 
money. This, too, depreciated, and was practically a 
failure, and was ultimately abandoned. 

With the organization of the United States, our mone- 
tary history was marked by fewer vagaries. By the act 
of April 2, 1792, gold and silver standard money and 
subsidiary coins were authorized and their coinage begun. 
Previously to this, in 1786, a law had been passed making 
the Spanish milled dollar the standard of the United States, 

341 



ECONOMICS FOR HIGH SCHOOLS 

but no coinage was begun. Gold had been undervalued 
by the act of 1792, consequently it was exported; and 
the act of 1834, changing the ratio so as to raise the value 
of gold, was passed to remedy this. The next change 
was by the act of February 21, 1853, which reduced the 
subsidiary coinage to the status of token money, to pre- 
vent exportation. Previously, the subsidiary coins had 
been proportional in weight to the dollar; thereafter, 
they were made of less than their face value of metal. In 
1873 the unit of value was made the gold dollar, the coinage 
of the trade dollar was authorized, but the standard silver 
dollar was omitted. The legal-tender property of the 
trade dollar was removed in 1876, and in 1887 its coinage 
was prohibited. The coinage of the standard silver 
dollar was resumed by the act of 1878, but was on govern- 
ment account, and not on the account of individuals as 
had been provided in the early acts of 1792, 1833, and 
1837. By the Sherman act, in 1890, the purchase of silver 
for the purpose of coinage was ordered increased, but on 
November i, 1893, the clause authorizing the purchase of 
silver for coinage into standard silver dollars was repealed. 
No paper money was issued by the United States until 
1861, at which time the " demand notes " were authorized. 
These were speedily followed by the " greenbacks," the 
issue of which eventually reached $449,338,902. 

References. — Jevons, Stanley, "Money and the Mechanism 
of Exchange,"' "Investigations in Currency and Finance"; Nichol- 
son, J. S., "Money and Monetary Reforms"; Walker, Francis 
A., "Money"; Laughlin, J. L., "The Principles of Money"; Scott, 
Wm. A., "Money and Banking"; Bullock, C. J., "The Mon- 
etary History of the United States"; Kinley, David, " Money." 



342 



CHAPTER XXIX 

CREDIT AND BANKING 

283. Definition of Credit. — Under the present organ- 
ization of society it is impossible to carry on business 
without credit. Credit is the power to command present 
wealth or services in exchange for some assurance of a 
future payment or return. It is built primarily on the 
confidence we have in individuals to pay. Not only must 
we have confidence in their ability to pay, but also in 
their integrity. We must also have confidence in the 
property which is used for security. When these con- 
ditions are secured, then there is an opportunity to carry 
on business in a substantial way. It is said that over 
90 per cent of the business transactions of the world are 
done on credit; that is, people are to this extent trusted 
for payment. 

284. Instruments of Credit. — There are certain evi- 
dences of credit in the form of — first, promises, such as 
individual notes, bank notes, deposits, book accounts, 
stock certificates, and bonds; and second, certain orders, 
such as post-office orders, bills of exchange, checks, and 
mobilization certificates. These mobilization certificates 
are simply orders for the delivery of certain goods, such 
as petroleum, pig-iron, or whisky, at a certain place. 
These certificates are bought and sold, and are exchange- 

343 



ECONOMICS FOR HIGH SCHOOLS 

able; their object is to facilitate exchanges in the specu- 
lative market. 

285. Credit and Value. ^ — The relation of credit to 
value is difficult to determine. Some hold that credit 
is capital, and hence, having value, must be wealth. So 
far as the individuals are concerned, the credit instru- 
ments which they hold, when they are orders or demands 
upon property, may be considered as individual capital, 
and consequently wealth; but the issuing of exchange 
certificates to individuals would neither increase nor 
decrease the wealth of the community, hence they could 
scarcely be called social capital. In one sense, credit is 
a most valuable thing, but it is a valuable means rather 
than a valuable substance; it has no material existence 
in itself, and he who holds an instrument of credit must 
understand that if it is a resource to him, it is a liability 
to some one else ; if it is a credit to him, it is a debit to some 
one else. Therefore, it cannot be classified along with 
other capital. We must insist, that even though certifi- 
cates may form an evidence of a man's resources, they do 
not form additions to wealth; nor can you reckon in the 
community's wealth the titles to the same property. If 
we were taking a category of the wealth of a nation, the 
property itself and the titles to the property could not be 
counted at the same time. 

286. Advantages of Credit. — Credit has, nevertheless, 
many economic advantages. It is rather a means of 
wealth than wealth itself. It bears the same relation to 
general business that electricity and steam do to the 
industrial life. First, the clumsy method of barter was 
superseded by the use of money, and when money became 

344 



CREDIT AND BANKING 

deficient or too slow for the transaction of business, credit 
was introduced. By means of it small sums of money 
may be collected in one amount and used. These small 
sums would be useless unless somebody was intrusted 
with the management of all. It also collects capital and 
allows it to be used through more productive hands. It 
likewise supplies a powerful motive for the accumulation 
of wealth. Without credit few of the great enterprises 
of modern times could be carried on. The railroad 
would be built, if built at all, by the capital of one man 
instead of the combined capital of thousands. Even the 
factory and mill must be built on the credit basis, other- 
wise they would not be built. 

There are certain forms of credit which may have 
exchange value, becoming wealth and capital at the same 
time. Take, for instance, immediately redeemable gov- 
ernment paper. It is covered by only a partial reserve. 
This passes into the community as wealth and capital; 
however, if the government is estimating its own material 
resources, it becomes a doubtful question whether it is 
capital or wealth. It cannot estimate it any other way 
than a form of indebtedness on the part of the government. 
It may be wealth to the individual who holds it only on 
the basis of division of wealth, as a representative of his 
share, but the wealth of the community is not increased 
unless perhaps indirectly, by displacing more valuable 
money, such as gold, and using a cheaper instrument 
in its place. The gold then can be used elsewhere, and 
the paper money serves to increase credit. 

287. Credit Creates Capital. — It is not an agent of 
production, such as land or labor, but rather a special 

345 



ECONOMICS FOR HIGH SCHOOLS 

mode of production, a method of trade, which has become so 
universal that it is recognized as an economic function, like 
division of labor, and exchange. By it all forms of industry 
are quickened and the means of rapid work increased. 

288. Effects of Overstrained Credit. — Overstrained 
credit brings commercial crises and panics. It promotes 
indebtedness on the part of the poor, and sometimes 
transfers wealth from a more to a less productive hand. 
An overstrained credit may unduly stimulate demands, 
and thus raise prices and introduce commercial panics. 

289. Inflation of the Currency. — Overtrading is one 
of the primary causes of commercial crises. People who 
buy more than they can sell, or borrow money to invest 
in trading and business without anything but speculative 
hope of return, find themselves suddenly short in their 
accounts. When a call for cash comes, there is not enough 
to go around, and one trading house after another must 
suspend payments. The result is, that they have traded 
on fictitious values with the hope of real profits. This 
condition is frequently enhanced by an inflation of the 
currency, which gives undue encouragement to business 
on account of the fictitious profits, which seem much 
greater than they are. It also develops a speculative 
tendency, and builds up business on a weak foundation. 
The remedy frequently applied is to throw out more money ; 
to satisfy the demand, but this only increases the evil. 
Prices continue to rise, and people, in a vain attempt to 
realize the supposed results of these high prices, go into' 
excessive business and overborrow. Finally, there is a 
collapse in these fictitious values and a failure of certain ', 
houses, which pull down others and involve very many. 

346 



CREDIT AND BANKING 

There is then a long period of commercial retrenchment 
on account of the contraction of business; money is 
scarce, and business reaches a point of stagnation. 

290. Banks as Centers of Business. — Banks are cen- 
ters of business, because they furnish the free capital with 
which to carry on old business or to establish new. They 
are sometimes called the nerve centers of the business 
system; hence they are indicators of prosperity or of 
depression, and a sound banking system is always essential 
to a healthy commercial condition. 

Banks act as depositories of funds. They have sprung 
up naturally and essentially for this purpose. Were all 
the banks abolished to-day, some new method of banking 
would be instituted before the day was over. Serving as 
depositories, they are the custodians of the funds used 
in carrying on trade. They also serve as means of mak- 
ing issue of money or bills for the purpose of exchange, 
although this may not be an essential function of banks. 
They are used almost universally for making deferred 
payments, for collecting and discounting bills. As such, 
they have been regulated in different ways in different 
countries. 

291. Rise of Banking. — The earlier banks began 
with a very hmited business. The Bank of Venice, estab- 
lished in 1 1 71 as a bank of deposit, was one of the first 
organized. It issued no notes, and transfers could be 
had only on the books of the bank. The Bank of Amster- 
dam, organized in 1609, the Bank of Hamburg, in 1619, 
the Bank of England, in 1694, the Bank of France, in 
1800 — all had rather primitive banking functions, 
excepting the banks of France and England. The Bank 

347 



ECONOMICS FOR HIGH SCHOOLS 

of Venice from its foundation was controlled by the state, 
and was a mere method of security against bad paper 
and bad coins. The Bank of Amsterdam originated 
from the distrust of poor coins, and its paper guaranteeing 
full weight was held at a premium above the cheaper 
coins. 

292. What Constitutes a Sound Banking System. — 
A banking system, to be sound, must have a sufficient 
banking capital, adequate to the business done. Certain 
laws should be established in regard to deposits, loans, 
circulation, and invisible and tangible property at all 
times sufficient to meet the legitimate demands. Beyond 
this, in the case of banks of issue, the notes should be 
doubly secured. 

There are two great methods of banking: one is the 
state banking system, in which the government becomes 
responsible, owning and operating its banking business; 
the other is a private banking system, in which individuals 
are permitted to carry on independent banking. Some- 
times private banks have a large amount of government 
inspection and control, which makes a third class. A 
free banking system permits certain individuals to carry on 
banking under a general law established by the govern- 
ment. All that is required is to fulfill certain conditions, 
no requirements excepting for safety and general con- 
venience being established. In such cases the bank notes 
should not be legal tender, but should simply be secured 
by the resources and assets of the bank.^ 

293. Bank of England. — The Bank of England was 

' Such notes should be allowed to circulate to such extent as the 
credit of the issuing bank makes people willing to accept them. 

348 



CREDIT AND BANKING 

chartered in 1694, and, like most of the early banks, 
had its origin in financiering. Certain persons agreed 
to loan the government ;^i, 200,000 for the purpose of 
carrying on the war with France, on the condition that 
they should be organized and chartered under the title 
of The Bank of England. One of the favorite conditions 
also was that it had a monopoly of the note issue, — all 
corporations, excepting The Bank of England, having 
more than six persons, not being allowed to issue notes. 
In 1826, branches of The Bank of England were estab- 
lished at different places, and joint-stock companies 
situated more than sixty miles away from London were 
allowed to have the privilege of issuing bank notes. This 
curtailed to a certain extent the monopoly enjoyed by 
the bank. In 1844 Mr. Peel's celebrated Bank Act 
separated the note-issue department from the banking 
department, and limited the paper currency of the country 
so as to make it rise and fall in conformity with the move- 
ment of gold coin and bullion. It was provided that 
the issue department might send out ;;^i4,ooo,ooo of notes 
based upon government securities, and for every note 
issued above that amount, its equivalent in gold coin or 
bullion must be deposited. By the process of absorbing 
the liabilities of other banks, the amount of notes issued 
on government security has been increased to ;^i 6,800,000. 
Thus it appears that the only way of increasing the circu- 
lation of the bank is to bring in gold for deposit from the 
outside, which renders it elastic up to a certain point 
only. 

The notes of The Bank of England have been legal 
tender since 1833, " so long as The Bank of England shall 

349 



ECONOMICS FOR HIGH SCHOOLS 

continue to pay on demand their said notes in legal coin." 
The issue of bank notes in 1896 was for ;£59, 776,325, and 
;^42,968,325 of this was issued on gold coin and buUion. 

294. Bank of France. — The Bank of France was 
organized in 1800, but was reorganized in 1848. It, 
with its branches, is the only bank of issue in France. 
Its capital when it was first founded was 30,000,000 francs, 
which has been gradually increased to 500,000,000. As 
far as its capital is concerned, it is a private institution, 
belonging to the shareholders, but the governor and two 
assistant governors are appointed by the president of the 
republic, and are removable at his will. It may issue 
legal-tender notes to any amount it pleases, according to 
charter, although the amount issued is limited by law to 
4000 million francs. Under this limit the whole amount 
is left to the discretion of the managers of the bank. 
The denominations of its notes range from five francs 
to 1000 francs. These bank notes are payable in coin 
on demand, in either gold or silver. In practice the 
government pays gold or silver, to please the person who 
presents the note; but in the case of deficiency of gold 
it puts a small premium on gold, in order to keep the 
equihbrium. The coin reserve is very large, having been, 
in 1895, 3,184,000,000 francs, of which nearly half was 
silver. 

295. National Banks of the United States. — The 
banking system of the United States has had a pecuhar 
history. The first and second national banks of the 
United States were more or less under the patronage 
of the government, though they were semi-private institu- 
tions. The government, finally failing in its banking 

350 



CREDIT AND BANKING 

project, went out of the business. During the whole 
period certain private banks were chartered from time 
to time. The banking system was built up from charters 
issued by the states, or under general laws of the various 
states of the Union. 

In 1863 the present National Banking System was 
established. The object of its establishment was to 
unify and render secure the banking system of the United 
States. The laws for the establishment of the state 
banks were so various, and the advantages taken of these 
laws were so great, that it led to an unsafe and unsound 
system of banking. Much of the paper became depre- 
ciated and worthless, and some of the banks failed on 
account of the loose legislation. There was no unity, 
no system, no uniform foundation for credit. A bank- 
ing system was proposed which should remedy these 
evils. Another object was to market the United States 
bonds, they being used as security for the circulation of 
these banks. 

296. Organization. — Any five persons in any city or 
town could organize a bank by complying with the law. 
In places of less than 6000 inhabitants there must be $50,000 
capital; places having over 6000 and less than 50,000 in- 
habitants could establish banks with $100,000 capital; 
while in places having over 50,000 people there must be 
a capital of $200,000. One half of the capital must be 
paid up before beginning business, and the other half within 
five months. For the security of the circulation, it is neces- 
sary that the bank purchase an amount of bonds, which is 
to be deposited in the treasury of the United States. Ninety 
per cent of the par value of the bonds may be issued in uni- 

3Si 



ECONOMICS FOR HIGH SCHOOLS 

form bank notes signed by the president and cashier of the 
bank issuing them. A fund equal to five per cent of this 
outstanding circulation must be deposited at Washington 
for the redemption of these notes. It is not necessary that 
the bank issue notes at allj but it is required to keep on 
deposit with the treasurer of the United States a certain 
amount in bonds. For banks of $150,000 or less capital, 
the minimum is one fourth of their capital, and for banks 
of more than $150,000 it is $50,000. 

297. Regulation. — The whole system is placed under 
severe rules, regulation, and government inspection. The 
notes are doubly secured by the resources of the bank, 
double liability of stockholders, and the bonds deposited 
with the United States government. Depositors are se- 
cured on the resources of the bank, including the double 
liability of stockholders. 

The banking and currency law of March, 1900, made a 
few very important changes. Among other things, it 
provided that the gold dollar consisting of 25.8 grains of 
gold nine tenths fine should be the standard unit of value, 
and all other forms of money issued by the United States 
should be maintained at parity. It provided for the re- 
demption of the coin certificates of July 14, 1890, in gold, 
and for the maintenance of a reserve fund for that purpose. 
It further provided that silver certificates of over $10 de- 
nomination should not be issued except in case the secre- 
tary of the treasury might, if he deemed it necessary, issue 
not to exceed in the aggregate ten per cent of the total 
volume of said certificates in the higher denominations. 
The law also permits the establishment of national banks of 
$25,000 capital in towns having not over 3000 people. 

352 



CREDIT AND BANKING 

For the increase of bank-note circulation it was provided 
that notes might be issued to an amount equal to the par 
value of the United States bonds deposited for that purpose. 
Also, that when the two per cent refunding bonds are used 
for the purpose of securing circulation, the taxes on average 
circulation of notes shall be reduced to one half of one per 
cent per annum. The law further provides for treasury 
divisions of issue and redemption, which keep all of the 
records and accounts relating to the issue and redemption 
of United States notes. The purpose is to separate the 
note- issue department from the ordinary fiscal work of the 
treasury. Other provisions of minor importance relating 
to the banking and monetary system of the United States 
were made. Upon the whole, the banking system as now 
established represents a safe, substantial, and fairly elastic 
system. 

One of the greatest difficulties to be overcome in any 
bank-note issue is that of inelasticity. The present na- 
tional banking system of the United States has been de- 
fective in this respect. Secured by United States bonds, 
the amount of the circulation expanded and contracted 
according to the amount of bonds purchased. When bonds 
were at a very high premium, it proved to be a losing busi- 
ness with the banks, and they withdrew their circulation 
just at the time when it was most needed by the people. 

298. Canadian Banking System. — The Canadian bank- 
ing system seems to have more elasticity in this respect. 
There are central banks and branch banks. Sixteen banks 
maintain nearly three hundred and forty branches, while 
of the remaining twenty-two banks, eight have no branches 
at all. Notes may be issued up to the paid-up capital of 

2 A 353 



ECONOMICS FOR HIGH SCHOOLS 

each bank, with the exception of the Bank of British 
North America and La Banque du Peuple, neither of which 
is permitted to issue circulating notes to an amount greater 
than seventy- five per cent of its paid-up capital unless other- 
wise provided for. The notes are secured against the assets 
of the bank, including the double liability of stockholders. 
Each bank is required to keep on deposit an amount equal to 
five per cent of its average circulation for the previous fiscal 
year. This deposit bears interest at the rate of three per 
cent per annum. This makes a redemption fund which shall 
be used for the payment of the notes of any failing bank if 
such bank does not make provision for such payment 
within two months after the date of suspension. By means 
of establishing various branches, the demands of the people 
are fully met, and by the method of issue such elasticity is 
secured that the amount of notes sent out varies twenty per 
cent above normal circulation when excessive demands 
are made for currency. 

299. Savings Banks. — These are among the best mod- 
ern institutions for the encouragement of thrift and in- 
dustry. The question of saving means simply that the 
individual will deny himself unnecessary and trivial ex- 
penses for a larger and better use of the money at other 
times. One of the unfortunate things regarding savings 
banks throughout the Union is that they have not been 
properly restricted according to law, and have been left to 
private individuals who have not been responsible agents; 
hence the failure of their savings banks has been disastrous 
to many communities. The failure of the savings banks 
has a more demoralizing influence on humanity than the 
failure of banks of any other system. If private parties 

354 



CREDIT AND BANKING 

are to be allowed to carry on savings banks, they should be 
under the most strict governmental regulations, and actual 
security of the deposits guaranteed by the state. 

300. Postal Savings Banks. — Several countries have 
facilitated the method of saving by establishing postal 
savings banks ; that is, the establishment of savings banks 
in connection with the post ofiSce. A card having room 
for a certain number of stamps is issued for the smaller 
deposits. When a stamp is bought, it is placed upon the 
card; when the card is full, it is returned, and credit given 
for the amount on the card. Larger amounts are deposited 
directly, and credit given on the whole amount. Interest 
is paid on all of these deposits. The deposit allowed by 
one individual is limited. The whole system is one of 
economy, from which the banking principles reach the 
people in the most convenient way. Every state would 
find this a convenient and economic method for encour- 
aging savings and developing the banking system. 

References. — Dunbar, C. F., "Theory and History of Bank- 
ing"; BoUes, Albert S., "Practical Banking"; Gilbert, "History and 
Theory of Banking"; Conant, Charles A., "History of Modern 
Banks of Issue"; Breckenridge, R. M., "The Canadian Banking 
System"; Taussig, F. W., "The Silver Situation in the United 
States"; Cleveland, F. A., "The Bank and the Treasury"; 
Cannon, J. G., "Clearing Houses"; Mitchell, "A History of the 
Greenback." 



355 



CHAPTER XXX 



PROCESSES OF EXCHANGE 



301. Organization of Exchange. — Exchange is one 
of the most important branches of commercial hfe, as it 
permits the utilization of all surplus products of individ- 
uals or nations. People are thus enabled to carry on cer- 
tain lines of industry, and exchange their surplus products 
for the surplus products of other industries. This brings 
the utility of the whole world into service, and saves time 
and energy. 

In primitive society exchange was very light. It con- 
sisted in moving those articles possessed of relatively great 
value in small compass or bulk, and was not carried on 
systematically. By and by we find the development of a 
systematic trade through peddlers who carried their wares 
about with them, or by caravans exchanging the surplus 
products of different countries. Then in the early periods 
of civilization, down to the Middle Ages, a large proportion 
of the goods manufactured was consumed at or near the 
place of manufacture. The trading by ships on the sea 
brought various luxuries to the ports for exchange; but 
after canal, railroad, river, lake, and ocean traffic became 
developed, all material, light or heavy, was easily ex- 
changed.^ 

1 See Bk. I., Ch. VII. 
356 



PROCESSES OF EXCHANGE 

So complete has this exchange of surplus products be- 
come that now even vegetables are transported around the 
world. One can enter any town in the interior and find 
there the fresh fruits of nearly every country. To-day we 
find exchanges being organized throughout the world, 
and conducted in a systematic way. All processes of ex- 
changes are greatly facilitated by competent transportation 
and by large organizations of producers and distributers. 

302. Importance of Exchange. — All legitimate ex- 
change is an increase of utility, for it enables persons to ex- 
change the surplus of one article for another of which there 
is a deficiency. A large surplus of corn in Kansas or wheat 
in Argentine would remain useless, to decay or to be used 
for fuel, unless it could be exchanged for machinery or 
furniture or dry goods or the vegetable products of other 
countries. Exchange enables these countries to produce 
corn, wheat, and cattle, — those products for which they are 
particularly adapted. Certain territories that can produce 
articles at a greater advantage than others can exchange 
these articles for the others which are necessary or conven- 
ient, created in other districts, at great advantage. This 
increases the productivity of labor and of capital, for it 
enables various persons to engage in pursuits for which they 
are particularly adapted, or which are best suited to their 
capacity and condition. It is evident that in all legitimate 
trade or exchange, all parties engaged are profited thereby. 
The theory that, if two persons trade, one must gain and the 
other lose is entirely improper. The fact is that people who 
trade should each gain thereby. This is the fundamental 
principle in all exchange. The poorest workman in a small 
town has the advantages of exchange. While he works 

357 



ECONOMICS FOR HIGH SCHOOLS 

by the day in a simple occupation, he sits down at a meal 
where the table is supplied from the products of the world, 
and he receives the necessaries of life from many countries 
which are supplied by thousands of laborers. 

303. Means of Exchange. — There is developed a large 
class of traders whose entire business is to make exchanges 
between different communities, countries, and individuals. 
These economic classes are indispensable to modern in- 
dustrial life. Various attempts have been made to get rid 
of " middlemen," who bring the producer and consumer 
together for the purpose of exchange. This attempt has 
failed. To a certain extent this class has become too large 
in many instances. In our small towns, as well as in our 
large cities, there are too many tradesmen and too many 
agents who carry on legitimate business. From time to 
time this readjusts itself, and the tradesmen turn to pro- 
ductive enterprises. 

To-day we find the post ofhce, the express companies, 
freight companies, railroad and transportation companies 
always ready to transport goods with facility and dispatch 
to any part of the world. In the aid of these the telegraph, 
the telephone, and the postal service render communication 
almost perfect. In connection with this we find the use of 
many great facilities for trade, but more expressly the credit 
system, which is an instantaneous process for meeting the 
demands of exchange. The banking and credit systems 
of the world complete this great mechanism of exchange. 
The clearing houses of countries and of the world render 
the system of debt payment almost perfect. Back of all 
this economic mechanism is the legislation of states and 
nations concerning the administration of commerce. 

358 



PROCESSES OF EXCHANGE 

This involves a system of rules and regulations and laws 
for the proper conduct of all such payments and of all 
forms of commerce and trade. 

304. The Market. — The market is a place where buyers 
and sellers come together for the purpose of exchanging 
wares. This may be either local or general; it may be 
either a retail market or a wholesale. The fundamental 
principles are the same in either case. For example, there 
may be such a thing as a horse market. This may be local, 
where a certain number of horses are offered for trade and 
a certain number of buyers come together to make the ex- 
change, or it may be so enlarged as to include the market 
of a whole country, or of the world, in which the horse 
market is daily weak or strong, and horses may or may not 
be in good demand. The retail market is a place where 
goods are sold in small quantities. The rates are different 
in each case, and market quotations have become general- 
ized. In either case there is no market, so called, until the 
regular price has been established according to the law of 
supply and demand, — the amount offered on one side and 
the amount demanded on the other. By the use of a well- 
established market people understand whether they are 
paying too much or too little for any line of goods. 

305. Domestic Exchange. — Domestic exchange is a 
term used to designate local exchange when applied to a 
nation or community. It is an exchange of manufactured 
goods or farm products, or raw materials or finished prod- 
ucts. Indeed, all of the various products of a country can 
exchange for home consumption. This is called the 
domestic market. In a domestic market an article usually 
has the same price over the entire country plus or minus 

3S9 



ECONOMICS FOR HIGH SCHOOLS 

the cost of transportation. Yet there are great centers like 
New York and Chicago, Paris and London, which have a 
tendency to fix the price of domestic products. However, 
every small town has its own local market, and prices will 
vary slightly according to conditions. 

306. Foreign Exchange. — Foreign exchange is the 
trade of one nation with another. In this respect the na- 
tion does not trade as one individual with another, but 
settles its balances. Individuals of one country trade with 
individuals of another, but in the settlement of balances a 
system of barter is introduced as between one nation and 
another. The settlement of balances between one country 
and another is carried on by the purchase and sale of 
exchange, so that the debts of one country offset the debts 
of another and the balances are paid. Individuals of each 
nation will trade with one another when it is an advantage 
for them to trade, and when that advantage ceases, trade 
will cease. Long-continued trade is kept up only on the 
basis of mutual advantage. 

307. International Values. — Owing to the fact that one 
country may produce an article much cheaper than another, 
prices in one will vary from those of another, and there will 
be established certain international values when there are 
no restrictions. However, international trade is not widely 
different from domestic trade, except in the method of 
settling balances, and even that diiTerence is not marked. 
The mode of foreign exchange varies little from that of 
domestic exchange. The buying and selling between for- 
eign countries is conducted very much the same as buying 
and selling between different parts of one great country. 
If a man in California buys a bill of goods in New York, 

360 



PROCESSES OF EXCHANGE 

he buys exchange on New York for the payment of those 
goods, and the state of Cahfornia has not transacted any 
business with the state of New York. The same is true 
with the man in New York who buys a bill of goods in 
London : he pays for them by purchasing exchange on Lon- 
don, The American government and Great Britain are 
not parties to the transaction, except so far as they regulate 
it by laws of exchange. Hence it must follow that inter- 
national values are not widely different from national values. 
It appears that very many false notions have risen in the 
minds of students on account of the carelessness of writers 
on this point. The trade of Great Britain with the United 
States is not a national process, but an individual affair. 
The effects on the nations may vary on account of the ship- 
ment of gold from one to the other, but the same might 
occur between New York and San Francisco. If a shortage 
of gold occurs in a nation, it may affect government finan- 
ciering, while the difference in the amount of gold on hand 
between New York and Chicago would have nothing to 
do with our national financiering. On the other hand, the 
difference between exports and imports of gold between 
New York and London might have considerable effect on 
our national financiering; otherwise the principle remains 
the same. 

There are, however, such things as international values, 
dependent to a large extent on the immobility of labor, 
capital, and the various conditions of business. Because 
transportation and communication are so much facilitated, 
there is a tendency for wages and interest to be equalized 
all over the globe, and also for the same grade of goods to 
have the same price everywhere, plus or minus the trans- 

361 



ECONOMICS FOR HIGH SCHOOLS 

portation. Hence tradesmen make more out of the ele- 
ment of time than anything else, which, of course, from 
an economic standpoint, tends to reduce profits more to 
the average of interest on capital, plus the service of 
management. 

There are what are known as natural advantages for the 
production of certain lines of goods, and to these may be 
added artificial advantages, including long experience in a 
business and the development of skilled labor, which make 
a difference in values of articles and stimulate international 
commerce. International trade thus enables a community 
to furnish goods which cannot be produced at home on 
account of the want of certain necessary requisites, and 
also, through the process of cooperation, enables a country 
to dispose of the surplus goods which it can produce 
most advantageously in exchange for those which cannot 
be produced as cheaply as in other countries. But it 
does not follow that because articles can be produced 
cheaper in another country, a given country should fail to 
manufacture them; for it is evident that if the prices of any 
given four articles (A, B, C, and D) are less in Germany 
than the prices of the same four articles in the United 
States, and that prices of any other four articles (F, G, H, 
and I) are greater in Germany than the same four articles 
in the United States, Germany would not manufacture all of 
the goods consumed of the first four articles and the United 
States all of the second four, although there is a tendency 
that way. The exportation of the first four articles from 
Germany to the United States and the second four from the 
United States to Germany would tend to influence trade. 
The demand having been satisfied on most articles, trade 

362 



PROCESSES OF EXCHANGE 

would fall off, while on others it would continue till the 
balance of trade must be paid in cash. When the balance 
of trade is paid in cash, this importation of gold into the 
country makes prices high, checks exports into the country 
receiving the gold balance, and increases the exports in the 
country sending it. The first effect is a reduction of trade 
in those articles in which there is a small difference between 
domestic and foreign prices, while the reduction fails to 
affect the trade between those articles in which there is a 
large difference. Therefore, in the course of trade it is 
easily seen that those commodities whose cost of production 
is very nearly the same in the two countries trading will 
soon cease to be exported, while those in which there is the 
greatest difference will continue to be exchanged. Now 
this difference of cost of production is largely owing to a 
difference in advantages. It is evident that a country 
will create and export those goods which it can most ad- 
vantageously produce, or those in which there is for the 
time the largest difference in price in the two countries. 
Yet, in considering this, the real basis of operation is found, 
not in a comparison of the difference of cost of producing 
the article in the two countries respectively, but in the rela- 
tive cost of producing within a given country a certain 
amount of the articles for which there is a steady demand. 
In this argument it is understood that the price of produc- 
tion in a given quantity is estimated, as hitherto stated, 
by the subjective value; that is, the demand or marginal 
utility. 

A country may be able to create all of the articles which it 
imports from another country more cheaply than those same 
goods can be created in the country from which they are 

363 



ECONOMICS FOR HIGH SCHOOLS 

imported, but it will not do so, because it can devote itself 
more advantageously to the producing of a few of those 
articles in which the price is very different between the two 
countries, and exchange those for the goods which can be 
produced most advantageously in the country from which 
the goods are imported. With its present facilities, the 
United States, without a protective tariff, could produce all 
cotton and woolen goods needed for consumption in this 
country, and many of them as cheaply as the imported 
goods plus the transportation. But it is possible that peo- 
ple may devote their energies to industries which yield us 
a larger return, and import many of those articles in which 
there is a small difference or no difference between the cost 
of production in the United States and in the country from 
which they are imported. It is not here intended to discuss 
the principle of the development of a variety of resources 
of a nation and the employment of the capital of a com- 
munity in different ways for the sake of the development of 
the resources of the nation and the building of national 
credit and independence through diversified industries. 
Nor is it intended to show the advantages of free trade 
by allowing a nation to follow industrial pursuits which it 
can do most advantageously. A carefully administered 
tariff will observe this very thing, and will levy taxes 
upon those goods which may be most advantageously 
manufactured in other countries. Many persons have 
drawn an important conclusion here in respect to the evil 
effects of the tariff in turning a nation from a natural chan- 
nel of manufacture and trade. The evil lies in the method 
of managing the tariff, rather than in the tariff as an insti- 
tution. (See Bk. III., Ch. II.) 

364 



PROCESSES OF EXCHANGE 

308. Balance-of -Trade Theory. — There is a theory that, 
in trading, the nation which receives the largest payment of 
cash balance is really the gainer in trade. This may 
not necessarily follow. It will depend largely upon 
the condition in which the articles are manufactured and 
sold. A nation may be importing goods from another 
country in such an advantageous manner to herself 
that those goods are worth more than cash sent out, 
plus the cost of transportation ; and indeed it is a supposition 
of trade that if a man spends a dollar for a hat, the hat is 
of more advantage to him than the dollar, and what we call 
wealth and the well-being of a nation is the goods that that 
nation may import which are of greater service than the 
money sent out. But owing to the fact that the goods are 
yet to be marketed, and because it takes a sufficient amount 
of free capital to run a business of the nation, a large and 
sudden exportation of gold in the payment of the balance of 
trade will create alarm in the minds of financiers, who see 
that the means of carrying on trade prosperously are being 
shortened. In reality, however, a greater value has been 
left in the country in the goods yet to be marketed. 

Also, the old feeling that if two nations trade, one will lose, 
and the other gain, leads us to false notions of the importance 
attached to foreign trade. The fact is, that nations will not 
trade with each other unless it is advantageous to both; 
and they may trade and both make by the transaction, or 
they may both lose temporarily — though one cannot 
make and the other lose perpetually. We should be care- 
ful not to measure the advantages of international trade by 
the balance of the imports over the exports or the excess of 
the exports over the imports, for the real advantages lie 

36s 



ECONOMICS FOR HIGH SCHOOLS 

back of these things which are seen. In the long run, 
owing to the balance of accounts for cash, the trade of dif- 
ferent countries balances. The old economic idea was, 
that the excess of exports over imports represents the gain 
of the nation in trade. The free trader says that the excess 
of imports over exports represents the nation's prosperity. 
These statements are in part true, for balances represent 
only the margins of trading in the different countries. The 
real advantage, as stated above, is in the fact that parties 
gain in the transaction by having an increased amount of 
wealth for consumption and utility. As Cairnes says, " It 
would be just as reasonable to represent the advantages of 
learning as measured by the salaries of the teachers, as to 
represent the advantages of trade between two countries 
by the margins of profits of those engaged in trade." 

In estimating the true balance of trade, there are several 
things to be considered. It must not be limited to the 
excess of goods exchanged for goods. The whole account 
of debit and credit must be shown, including the cost of 
transportation. The freight charges are always a burden 
of trade, and go ultimately to the country that furnishes 
the transportation. This freight on goods will vary on 
different articles, being much larger in proportion on heavy 
goods and raw materials than on light goods and highly 
finished products. Therefore, in estimating the value of 
goods of one kind or raw material exchanged for goods of 
another kind, a highly finished article, freight is a great 
item in showing a balance. Again, there are several ac- 
counts which are settled by international balance, such as 
interest on capital invested, the expense of foreigners living 
in the two countries, bankers' commissions, and various 

366 



PROCESSES OF EXCHANGE 

Other items. These must, of necessity, be taken into ac- 
count before a true estimate of the balance of trade is 
made. 

It is easily seen that domestic trade is, after all, of greater 
importance than foreign trade, as far as national prosperity 
is concerned. Hence it is that while the latter should be 
encouraged, nothing should be done to impair the former. 

References. — Goschen, G. J., " Theory of Foreign Exchanges "; 
Mill, J. S., "International Values"; Bullock, J. B., "Introduction 
to Economics." 



367 



BOOK THIRD 
PUBLIC ECONOMICS 



CHAPTER XXXI 

GOVERNMENT RESTRICTION AND CONTROL 

309. Significance of Public Economics. — Public eco- 
nomics has become very important in modern industrial 
life. It is impossible to consider private economics 
without coming in contact with the relations of the state 
to trade and industry. No persons can justly be con- 
sidered well versed in political economy, nor indeed under- 
stand the full relations of the people to one another, with- 
out a full consideration of public economics. 

310. Free Trade and Free Competition. — As has been 
previously stated, the laws of pure economics are based 
upon the condition of free trade and free competition. That 
is, if laws act with precision, the condition of free trade 
and free competition must be fulfilled without hindrance. 
There must be no monopoly to prevent the competition, 
or other hindering restrictions on trade. All philosophical 
discussions of political economy recognize these principles. 
That these conditions are the best for economic society 
is not necessarily true. 

311. Views of Early Economists. — Advocates of both free 
competition and restrictive measures have appeared from 
time to time, who have advanced arguments in favor of 
their chosen side of the question. The first great group of 
economists were the Mercantilists, who advocated among 

371 



ECONOMICS FOR HIGH SCHOOLS 

Other things restrictive measures in trade. They held 
that all gains in a nation arose from trade, and that certain 
laws should be established for keeping money in the coun- 
try, as the amount of money was an indication of the amount 
of wealth of a community. This principle applies restrictive 
measures to trade and attempts to control certain indus- 
tries. The advocacy of restriction was carried to such an 
extent as almost to exclude the consideration of freedom 
of trade and industry.^ 

There followed a group of people called Physiocrats, 
who advocated among other things the principle that all 
values arise ultimately from the soil, and they sought to pro- 
mote agriculture and industry, and to place little value 
upon trade as a means of developing wealth. They ad- 
vocated also the freedom of trade, and that all restrictions 
should be taken from it. This led later to the develop- 
ment of the laissez-faire doctrine. 

Adam Smith followed, with his " Wealth of Nations," 
which really established the principle of freedom of trade. 
The nations, having tried restriction, found it to be a detri- 
ment, and to so greatly interfere with trade as to retard their 
growth, and finally reacted in favor of non-interference 
and free trade. The philosophers held that all inter- 
ference of the government was a detriment to the progress 
of nations; that if commerce and industry would be let 
alone, the laws of trade would be established according to 
justice and the best interests of the community; that each 
individual seeking his own interest would seek the interest 
of the community at large. This theory prevailed to a large 
extent, and the world felt the influence of it for many years ; 

> See Chapter VII., Bk. I. 
372 



GOVERNMENT RESTRICTION 

but it finally awoke to the idea that no one formula or theory- 
could at all times govern the actions of nations in relation 
to trade, and that, as political laws were made to establish 
and insure freedom, it was necessary, in order to secure 
freedom and justice in the commercial world, to establish 
certain regulations; and so the modern world has reacted 
from this position of laissez-faire. Perhaps the growth of 
monopolies, which has tended at all times to break down 
free competition and free trade, has promoted the inter- 
ference of nations in regard to the regulation of trade and 
industry. 

312. Modern Restrictions upon Industry and Trade. — 
A large number of laws have been passed restricting indus- 
try and trade. Protective tariffs indulged in to a greater or 
less extent by all nations; laws regulating and limiting the 
power of corporations; laws regulating the limits of cer- 
tain industries, — all show the development of a tendency 
toward restrictive measures. 

We find, also, a large number of laws made for the insur- 
ance of the rights of labor; laws controlling the building 
of factories, for the protection of life and limb, sanitation 
and safety of the laborers, — all showing that the govern- 
ment has its interest in all classes of people. A large num- 
ber of labor commissions in the states of the Union and in 
various foreign countries which inquire into the condition 
of labor and recommend certain laws concerning its protec- 
tion and control, show the tendency of restrictive measures 
in this line. 

Much legislation has been done to develop commerce. 
The carrying trade of different nations has been encouraged 
by laws and subsidies. Also, the extension of railroads 

373 



ECONOMICS FOR HIGH SCHOOLS 

has been encouraged by means of land grants and sub- 
sidies; nations have given encouragement to commerce 
and commercial enterprises by the development of canals 
and waterways. There are many other means for the 
encouragement of commerce. The Interstate Commerce 
Commission, established by the United States government 
to inquire into the conditions of railroads and commerce in 
general in the United States and for their restriction 
and regulation, and the various state commissions, all 
have a tendency to place transportation within proper 
bounds. 

Considerable legislation has taken place in recent years 
to encourage the development of the resources of the coun- 
try. At one time a bounty was given by the United States 
government for the production of cane sugar, which had 
a tendency to develop that industry for a time. Had it 
continued, the nation would soon have had sufficient sugar 
manufactories to supply its own needs. Whether this 
would have been a wise movement or not would have 
depended upon the effect in increased taxation and the 
effect upon other industries and trade. A bounty is now 
given to manufacturers of beet sugar which is a great 
stimulus to that industry. Bounties have been given for 
the planting of forest trees in semi-arid districts. The pro- 
tective tariff is urged as a means of developing home 
industries. In many other ways the government has 
encouraged industry. 

The prohibition of the manufacture of certain articles 
has been declared in various instances. A law against the 
manufacture and sale of intoxicating drinks is among the 
most important. Other industries are purposely burdened 

374 



GOVERNMENT RESTRICTION 

by a process of taxation, such as liquors, tobacco, oleo- 
margarine, etc. These taxes are laid with a view to the 
partial suppression of the traffic. While at times they have 
more or less influence, upon the whole they are ineffective 
as prohibitive measures. 

313. Plane of Competition. — There is a great discussion 
and a wide difference of opinion as to the extent to which the 
government should go in the control of industries. The 
fundamental principle lying at the base of all this may be 
stated: That the government should regulate all compe- 
tition. It should set a limit beyond which competition 
should not go; it should also aid and assist certain in- 
dustries, if possible, by general legislation, without special 
favoritism and without detriment to other industries. 

314! Government Should Realize to the People the Bene- 
fits of Monopoly. — Having determined the plane of com- 
petition so that there is freedom and justice within certain 
limits, the government should go a step farther, and realize 
to the people the benefits of a monopoly which exists in the 
nature of things. There is no reason why the government 
should allow the development of a certain phase of indus- 
trial life which shall overshadow and overbear the efforts 
of a large portion of our citizens in industrial life, any more 
than it should allow the growth of a certain phase of po- 
litical life which shall overshadow and overbear a large 
number of citizens, oppressing them and preventing them 
from having the freedom and rights of political life. There- 
fore, wherever this monopolistic power becomes oppressive 
and unjust and un-American, it should be regulated by the 
government. Take the case of the street-railway corpo- 
rations and the gas companies. Franchises are granted to 

375 



ECONOMICS FOR HIGH SCHOOLS 

a few persons in the name of a corporation for the purpose 
of serving the pubhc. The people own the streets through 
which these persons operate, and by their vote exclude all 
but a few individuals from carrying on the special business. 
It is right that the people should have a rental for the use 
of the streets by private parties to the exclusion of all 
others; it is absurd not to charge the rental. Hence, in 
the form of a franchise tax or cheaper rates, or both, or in 
the form of municipal ownership, the government must 
realize to the people the benefits of the monopoly 
arising on account of rental of streets and public 
property. 

315. General Management of Industries. — There are 
several ways in which the state or government may deal 
with industries : first, it may let them entirely alone, leav- 
ing them to the laws of trade and competition on the sup- 
position that the largest justice will be meted out without 
any interference; second, it may establish such rules and 
regulations as would control them within particular limits; 
third, it may own and operate such industries as seem neces- 
sary for the benefit of the community. Perhaps no one of 
these rules could be laid down as universally correct, for 
the government seeks under all circumstances to provide 
for the well-being of the community at large, and may do 
anything that is possible or necessary for securing this 
well-being. The question to be considered is: What will 
produce that largest well-being at the least expense to the 
community? In other words, " What is expedient to do 
under the circumstances? " rather than, " What is theo- 
retically just? " 

In many instances there are industries to be let alone 

376 



GOVERNMENT RESTRICTION 

entirely, with the exception of certain rules of justice apply- 
ing to the intercourse of individuals. Second, there are 
those industries which are better controlled with certain 
laws and regulations for the purpose of determining and 
securing justice for the people. In the third place, there 
are those industries that are difficult to regulate and which 
it would be an advantage to the people for the state to own 
and control, and under such circumstances one must pre- 
sume almost entirely upon proper administration of affairs 
in order to secure justice. 

316. Control by Commissions. — One of the most 
important of modern methods for the control of industry 
is represented in the growth of railroad commissions in 
the United States. These commissions vary in regard 
to their powers. Most of them are simply advisory and 
limited in their jurisdiction. Some of them have great 
power to act. The Interstate Commerce Commission 
has done a vast deal to regulate industry, notwithstanding 
the fact that its powers have been greatly curtailed by 
the courts, having established uniform systems of book- 
keeping and uniform methods of reports. They have 
established that public carriers are public servants, and 
are amenable to the public for their wrong-doings; and 
have also done much toward establishing uniform rates 
and preventing extortion. The same may be said of 
nearly every railroad commission in the United States. 
These commissions gradually gain the confidence of the 
people and gain more power; and while many people 
advocate the public ownership of the railroads as a public 
necessity, it appears that it will be determined in most 
instances that the increasing power of the commissions 

377 



ECONOMICS FOR HIGH SCHOOLS 

will eventually furnish them ample control and regulation. 
The governments of Europe have had a large experience 
in the use of commissions. 

317. Government Ownership of Railroads. — There 
are many who advocate the government ownership of 
railroads because they are said to be natural monopolies. 
At best, they can only be said to be partial monopolies; 
and a system of government ownership, as established 
in different communities and states, has not proved en- 
tirely satisfactory. It would entail a vast debt on the 
United States to procure all the railroads, which are now 
capitalized at over ten billions of dollars. It would 
involve the employment of a vast army of people, which, 
if not put upon the civil-service rules, would be a dan- 
gerous political power. 

It would have some advantages in insuring a uniform 
system of rates and of traffic. It would prevent extortion 
and injustice, which sometimes prevail. It would prevent 
waste in some ways by the consolidation of different 
lines and the abolishment of parallel roads. It would 
prevent waste in management, dispensing with numer- 
ous high-salaried officials. And yet, on the other hand, 
without wise management railroads might fail to yield 
a dividend sufhcient to defray the interest on the payment 
of a necessary sinking fund for the reduction of the debt 
which must be assumed in the purchase of the roads. 
In comparing European management with American 
management, there is more progressive development in 
certain lines found in American railroads than in any 
others in the world. Indeed, Europeans are patterning 
after Americans with respect to equipment and comfort. 

378 



i 



GOVERNMENT RESTRICTION 

It also seems proper that the United States should pattern 
after the European lines in perfection of roadbed and 
precautions for safety. But the advantage of govern- 
ment ownership in regard to all of these matters is not 
evident, for England has a better system than is found 
on the continent, and still under private management. 
Many persons urging government control of railroads 
in the United States have failed to observe the enormous 
mileage compared with that of some of the European 
nations. It will be observed that the conditions vary 
in different countries, and consequently the same rule 
will not apply to all. 

318. Laws Controlling Corporations. — But whatever 
takes place in regard to specific industries, the general 
laws controlling corporations need careful supervision 
and enlargement. There should be more specific care 
in regard to such matters. It appears, then, that some- 
thing should be done respecting corporation regulations. 
Restrictions should be placed upon methods of organiza- 
tion, the granting of franchises, the issue of stock and 
bonds, and, in fact, laws made controlling and limiting 
the operation of corporations in many ways. 

319. Municipal Ownership of Gas "Works and Water- 
works. — It would seem that in cities where water is 
furnished for the people at large, it should be done by 
the city itself rather than be left to private corporations. 
The water supply is so essential to the sanitation, health, 
and convenience of all the people, it seems to be a very 
improper thing for a city to allow it to pass from under 
its control. Whatever is the expense, whether greater 
or less under city control, there can be no question that 

379 



ECONOMICS FOR HIGH SCHOOLS 

every municipality should own and manage its water- 
works, regardless of inconvenience and expense. 

In regard to the gas supply, it is a great question whether 
or not the city should own and operate its gas plant. 
There are several methods to be observed where the city 
owns its gas plant. In the first place, a normal price 
may be charged for the gas and the surplus turned into 
the public treasury to lighten taxation. In the second 
place, the gas may be furnished at a very low price, the 
city neither gaining nor losing by the operation. The 
third proposition is a combination of these two ideas, 
the gas being furnished to the people at something below 
the normal rate and still having a surplus for the treas- 
ury, — less than in the other case. 

As to the right of municipal ownership, there can be 
no question. The streets belong to the people at large, 
and no excessive monopoly should be given to any persons 
without adequate return. The city itself has a better 
right to use these streets to establish its own industries 
than has any private corporation or monopoly. There 
are many things pointing towards the expediency of the 
city ownership of gas. In European cities there are 
notable examples of success in the ownership of public 
utilities like gas, water, and street railways. Wherever 
this has occurred, the city government is far more efficient 
than in the average American city. Before municipal 
ownership should be seriously considered, a thorough 
revision and improvement of municipal government 
should take place. 

320. Government Management versus Government 
Ownership. — Those who advocate government ownership 

380 



GOVERNMENT RESTRICTION 

state that a revenue would be returned to the city which 
would benefit the community. Under wise management 
this may prove true; but it sometimes happens that a 
deficit occurs in city administration, and this revenue 
is not obtained. Moreover, there is always an attendant 
danger to business where politics prevails to a large extent. 
Until we reach a period where municipal government 
shall be conducted on a business basis, there can be no 
assurance that the gas supply will yield a return to the 
city. The new method of city government by commission, 
now being tried by some American cities, may be a partial 
solution of the question. It is urged, also, that political 
influence will be lessened by government ownership. 
It is held that under private corporations corruption is 
developed and the city council is elected by corrupt 
methods, so that corporations have their own way; while 
under municipal ownership this would disappear, — the 
records would show whether business was properly man- 
aged and the funds properly used. However, unless 
the increased responsibility would bring a better class 
of citizens to act as ofiicers, there could scarcely be any 
improvement in this line. It would seem that govern- 
ment control, wisely administered, would reach the same 
ends. Wherever the cities have managed their own 
gas works there has been a tendency to furnish a better 
quality of gas, at reduced rates, at least for a time. Where 
good business methods have prevailed they have made 
a financial success of the enterprise; where bad business 
methods have prevailed they have made a failure. 

321. Disposal of Public Franchises. — One modem 
method of disposing of public franchises seems to be a 

381 



ECONOMICS FOR HIGH SCHOOLS 

solution of the problem in a very satisfactory way. That 
is, the putting up at auction of all franchises to which the 
public rights are granted, and disposing of them to the 
highest bidder, letting only to responsible parties. These 
franchises are granted for a limited period of time, with 
the privilege of the municipality to purchase them at a 
normal price, or to renew, as it sees fit. In addition to 
this, the bid provides for the payment of a certain per 
cent of the gross proceeds into the public treasury. A 
provision is also made that the article furnished shall be 
of a certain grade and furnished at a maximum price. 
With these restrictions there is no reason why the munici- 
pality should not realize the benefits of the monopoly 
with certainty without government ownership. 

322. Economic Freedom Demands Restrictive Laws. — 
A great many people seem to hold that while laws should 
be established for the control of civil liberty, the state 
has no right to interfere with the economic life. The 
growing importance of economic life, however, has ren- 
dered it the base of all modem operations. All legisla- 
tion rests more, in these days, upon trade industries, 
commerce, capital, labor, corporations, and industries 
in general, than upon the bare fact of securing civil and 
political justice. The latter has to a great extent already 
been secured in our own country. It appears that indus- 
trial liberty or economic freedom should be maintained, 
and that it is just as essential to establish some general 
laws and restrictions upon trade and industry to secure 
economic freedom as it is to make political and civil laws 
for the security of political and civil freedom; and that 
this can be done without the state passing beyond its 

382 



GOVERNMENT RESTRICTION 

legitimate function in providing for the general well- 
being of the community. 

323, The Modern Trust. — There has recently sprung 
up a form of financial organization called the " trust," 
which has developed stupendous proportions. Within 
recent years it took the form of the organization of sepa- 
rate corporations into a pseudo-overcorporation. The 
pseudo-overcorporation took all of the corporations of 
a given industry into an association, issuing so much 
stock to each or else giving to each a certain proportion 
of the income of the new organization called the trust. 
That is, the business of the various corporations was 
held in trust by the superorganization, which might be 
dissolved at any time. There was a great question whether 
the trust was responsible as an organization or not, as it 
held itself ready to dissolve at any time. But by the 
power of law it has been forced more and more to become 
one large corporation, absorbing into one definite organi- 
zation all of the other corporations, the latter losing their 
identity in the former. 

The progress of the trust as it attempted to absorb 
all competing industries in a given line has been very 
marked, and the rapidity with which the trusts have been 
organized and in which small industries have been ab- 
sorbed has created alarm in the minds of the people. 
At the close of the year 1897 there were in trusts, none 
of which had a smaller capital than $1,000,000; while 
at the close of the year 1898, 98 more were formed, with 
an aggregate capital of about $2,000,000,000, — making 
the capital of all trusts formed by the close of the year 
1898 equal to about $5,000,000,000, or about one fifth 

383 



ECONOMICS FOR HIGH SCHOOLS 

of the assessed valuation of taxable property in the United 
States at the time of the census of 1890. The following 
are some of the principal trusts formed during the past 
few years, with their estimated or known capital: Joint 
Traffic Association, $1,404,130,581; Federal Steel Com- 
pany, $200,000,000; Reading Coal Company, $150,000,000; 
Western Union Telegraph Company, $95,370,000; Ameri- 
can Sugar Refining Company, $73,936,000; Standard 
Oil Company, $97,500,000; Wholesale Grocers' Associa- 
tion of New England, $75,000,000; Central Lumber 
Company, $70,000,000; United States Leather Company, 
$62,711,100; Chicago and Milwaukee Brewers' Associa- 
tion, $60,000,000; New England Insurance Exchange 
(84 insurance companies), $58,537,167; Steel Rail Asso- 
ciation, $50,000,000; Chemical Combine, $50,000,000; 
Carnegie Steel Company, $35,000,000; Consolidated Gas 
Company of New York, $35,430,060. Some recently 
proposed organizations are the Flour Trust, with a capital 
of $150,000,000; the Knit Goods Company, with a capital 
of $30,000,000; and the Thread Company, with a capital 
of $18,000,000. With the opening of the yean 899 trusts 
with gigantic capitalization were formed with wonderful 
rapidity, to the great alarm of many people. The United 
States Steel Corporation, formed by combining the princi- 
pal steel and iron corporations, now (1907) has a capitaliza- 
tion of $1,404,000,000. 

The chief objection urged against trusts by the people 
is, that they destroy competition and crush out the smaller 
concerns. That they destroy competition is true to a 
certain extent; but as there has never been a complete 
organization of any given industry, there is always a 

384 



GOVERNMENT RESTRICTION 

threatened competition. And it is a fact that on account 
of the concentration of a given industry, prices are more 
stable under the organization of the trust, and that in the 
long run they average lovi^er than under the competition 
of many small concerns. The wants of the community, 
both in manufactures and trade, are more carefully esti- 
mated by this means of social organization. 

That they crush out smaller concerns is true; and 
while the people at large may reap a benefit in reduced 
prices and more stable business life by the crushing out of 
the small concerns, it is a great detriment to the local 
communities where these concerns are established. It 
will be noticed that trusts always pay high for local enter- 
prises. This means that they anticipated making larger 
returns than were made by the smaller concerns when 
worked separately. It will be observed, however, that 
this can be done only by the reduction of expenditures 
and by the establishment of monopoly prices. It is a 
mistake to suppose that because an organization controls 
an entire industry it can charge such prices as it pleases. 
Yet many investors in stock of trusts called " industrials " 
are led to suppose this to be true. The fact is, after they 
become complete monopolies they must be controlled 
by monopoly prices and monopoly profits and threatened 
competition. (See Monopoly Profits, supra.) Another 
result is, that a large amount of money has come into the 
town which will immediately seek other investments, — 
probably in the town itself; and while the trust destroys 
one business in the town, it leaves a large amount of free 
capital to invest in other businesses. Another detrimental 
result is that men are thrown out of employment. Many 
2c 38s 



ECONOMICS FOR HIGH SCHOOLS 

of these will leave for other places, and, unless, as stated, 
other businesses spring up, trade will fall off with the mer- 
chants, and a general detriment to the community will 
ensue. This local destruction of business is one of the 
greatest evils of the modern trust; yet even it may have 
a compensation in the fact that a large amount of capital 
is freed for new enterprises, — and it is, after all, the free 
capital of th-e community that makes a business. 

Another objection to the modem trust made by the 
people is, that the power of concentrated capital to influ- 
ence legislation is great. No doubt this is the greatest 
danger in connection with it. Yet the danger here is not 
as great as it might appear, for when a trust controls the 
entire output of any industry, it has less desire to control 
legislation in its own interest than have several large 
competing concerns which attempt to take advantage of 
one another. Nevertheless, because they are never free 
from competition, as competition is between corporation 
and corporation and trust and trust, there may still be a 
desire for influencing legislation in various forms. 

It is objected that trusts raise prices by restricting pro- 
duction and keeping down wages. The fact is, the trusts 
to date have paid as high wages as the lesser corporations ; 
and when it is observed that there is an opportunity to pay 
higher wages there than elsewhere, no doubt wage-earners 
will receive their full share of the' business. Wages are 
certainly higher in proportion to interest and profits under 
the higher organization of industry than under the lower, 
where there were many competing groups. The real truth 
about the trust is, that it becomes a great corporation which 
will terrify us by its size, but which may be regulated by 

386 



GOVERNMENT RESTRICTION 

careful legislation so that its dangers may be turned into 
benefits to the people. 

The United States enacted an anti-trust law in 1890, 
which declares that combinations, or contracts in the form 
of trusts or otherwise, or even a conspiracy against trade 
or commerce throughout the several states of the Union 
or with foreign nations, was illegal; and insisted that every 
person or combination of persons who attempt to monopo- 
lize any particular trade or commerce among the several 
states is guilty of a misdemeanor. Many states also have 
attempted to make laws against trusts, and have succeeded 
at least in bringing before the people the subject of trusts, 
and in creating a great deal of discussion as to its nature, 
benefits, and dangers. 

Most of the trusts formed are broken down or will break 
down; many are being formed now on a fictitious basis, 
developing a great volume of stocks and industrials which 
sooner or later must lead many to failure. Many which 
survive the shock of public opinion or adverse legislation 
will pass into the form of gigantic corporations, whose ac- 
tions will be amenable to the law. While the rapid de- 
velopment of trusts has caused unnecessary alarm, they, 
like other forms of industrial life, need regulating by the 
law. The courts and the legislative power, if properly 
directed, will certainly regulate trusts so that they will prove 
a benefit rather than 'a detriment to the people at large. 
A uniform tax, if properly levied, would bring these or- 
ganizations into subjection to the will of the people. A 
tax which would destroy the extra business profit gained 
thereby would be not only constitutional, but effective in 
the regulation of trusts. It would be constitutional 

387 



ECONOMICS FOR HIGH SCHOOLS 

because it would be attacking a certain form of trusts, 
and such a tax would come in under the police regulation. 
It is a question which the modern student must examine 
very carefully. Whether eventually it will lead to social- 
ism, no one can tell; but the author apprehends that it 
will not. 

324. State Socialism.^ — Some go so far as to advocate 
government ownership of all industries, all lands, mines, 
manufactures, means of transportation, stores, — and, 
in fact, that all industries should be placed under the state 
management, and that all persons should be employed 
by the state, each then receiving his remuneration from one 
central authority. This is not at all necessary for the 
security of economic or industrial freedom. It is also 
accompanied by many dangers, from the fact that no for- 
mula will cure the selfishness of human beings, and that 
state socialism would be merely the means of concentrating 
such selfishness. Power given to the people in this man- 
ner to regulate all industries would end only in a few regu- 
lating the many, with the result of a revolution on the part 
of the many. 

References. — Ely, R. T., "Monopolies and Trusts"; Bemis, 
E. W., "Municipal Monopolies"; Ripley, W. Z., "Pools, Trusts and 
Corporations"; Jenks, J. W., "The Trust Problem"; Bolen, J. W., 
"Plain Facts as to the Trusts and the Tariff." 

1 See Chapter XXIV., Bk. II., Part III. 



388 



CHAPTER XXXII 

TAXATION AND REVENUE 

325. Relation of Taxation to Private Economics. — 

The question of taxes is one of distribution, generally speak- 
ing, because it must be considered as one of the ways in 
which the surplus product is disposed of. Also, it may be 
considered as the means of a part of production, inasmuch 
as it stimulates production, and the producer must enter 
it as one of his necessary expenses. Burdensome taxes 
may oppress industries and prevent the development of 
economic life. A tax that is not burdensome may do noth- 
ing more than stimulate the extra energy necessary for the 
increased production to cover the amount of the taxes. 

326. Taxation a Means of Improving Economic Pro- 
cesses. — Because of the expenditures of the government 
in maintaining roads, promoting justice and equality, and 
protecting life and property, taxes are among the best in- 
vestments for the improvement of economic processes. 
While we may speak of private economics and the great 
laws of supply and demand, we must understand that 
these laws would not develop without proper governmental 
protection, and that taxes are absolutely essential for the 
development of all economics; for we find the tax system 
closely related to pubHc economics. We cannot escape its 
use or its importance under such circumstances. Taxes 

389 



ECONOMICS FOR HIGH SCHOOLS 

should be administered with a great deal of care, and their 
assessment, collection, and expenditure more carefully 
guarded than almost any other public institution. 

327. Definitions. — Taxes have been defined as forced 
contributions of the people for the support of the govern- 
ment. They are not debts in the ordinary sense of the 
word, for they are not contracted by the payer. Neither 
are they paid for protection of life and property, but are 
placed in the general fund for government disbursement. 
As there is only one party to the transaction, they are 
called one-sided transfers, or forced contributions. 

Judge Cooley defines taxes as being "the enforced pro- 
portional contribution of persons and property levied by the 
authority of the state for the support of the government, 
and for all public needs." This definition upon the whole 
is correct from an economic standpoint, with the exception 
that taxes are sometimes levied, not for the purpose of 
public need, but for private appropriation; but if we in- 
clude in all public needs all public expenses, or those funds 
which the government needs for carrying out all the func- 
tions of government, then the definition is correct. For, 
indeed, the constitution of New York provides that " the 
assent of two thirds of the members elected to each branch 
of the legislature shall be requisite to pass a bill appropriat- 
ing the public moneys for local or private purposes." 

Paul Leroy-Beaulieu, in his " Traite de la Science des 
Finances," defines taxes in these simple words: "Taxes 
are simply contributions demanded of citizens as their share 
of the expenses of the government." And in a more elabo- 
rate manner, he continues on a subsequent page: " Every 
contribution regularly demanded of the citizens by the 

390 



TAXATION AND REVENUE 

stated authorities of the land for meeting the expenses of 
the government, is a tax." Again, if we are to take this 
definition in its full meaning, we must include in that term 
" expenses of the government," all expenses of the govern- 
ment in fulfilling its legitimate function as a representative 
of the nation. We must also say, in addition to this, that 
taxes are sometimes levied for the purpose of encouraging 
manufactures, as in the case of the protective tariff; for the 
sake of rendering void a law, as in the case of the Federal 
taxes on state bank notes for suppressing their circulation ; 
or, in the case of the extensive taxes on whisky and tobacco, 
for the purpose of suppressing vice. So that, in the defi- 
nition, taxes may mean something more than the collection 
of revenue for the bare support of the government 
machinery. 

There is a legal fiction that taxes are given in exchange for 
protection; but it will be noticed that the sovereign state 
demands this contribution of citizens regardless of any value 
which may come to the citizen in return for the contribu- 
tion. The law itself always fails to recognize in taxation 
any of the principles which apply to purchase or sale and 
to contracts and debts resulting therefrom. But do not 
taxes, in an indirect way, benefit the taxpayer ? Certainly 
they do, but not in a way similar to that implied in a con- 
tract arising through purchase or sale. While there is but 
one party to the proceeding, the other party may, in an 
indirect way, on account of the keeping up of social or- 
ganization and the improvement of the means of creating 
and holding property, reap a just reward in this general 
return. But suppose a person says, " I do not want to 
be taxed, and I'll not enter into this contract; I don't want 

391 



ECONOMICS FOR HIGH SCHOOLS 

to be protected, — I can take care of myself." Does the 
state pay any attention to him, and release him from his 
share of the obligation ? No ; he is a part of the great 
social organization, which has determined by long cus- 
tom, common consent, and legal authority, that a certain 
amount of funds shall be collected from each individual 
citizen according to his person or his property, and that 
these common funds shall be expended for the general use 
of the community; and as long as he remains in a com- 
munity the individual must pay the taxes. 

There is sometimes an assertion made in this connection, 
that taxes, though paid into the public treasury, will in 
time return to the pockets of the taxpayer. But this is a 
false supposition if we try to make it specific. Suppose a 
farmer pays $50 in taxes. In order to get this $50, he sold 
the produce of his farm. Now, if the government does not 
lay out the $50 in farm produce, it will not revert to the 
farmer. Suppose the government does expend $50 worth 
of produce; that is, the tax collector, the agent of the 
government, says, " You may have your money back by 
paying me its equivalent, $50 in produce." Upon this 
basis we have an extended argument that the keeping of 
soldiers and sailors will increase the demand for products, 
and thus will enhance the general welfare of the community. 
But this is only a nominal market and not a real market. 
To keep useless industries for the sake of enlarging the 
market is a false theory. The only way in which taxes can 
help industry by the expenditure of funds is to make a better 
system of communication, to keep better order, or to bring 
about favorable conditions of business. So, also, for the 
protection idea. The person who pays the least taxes may 

392 



TAXATION AND REVENUE 

sometimes require the greater protection of life and prop- 
erty, and he who pays most may be in a position to 
better protect himself and his property than he who pays 
little. 

328. Purposes of Taxation. — Taxation, then, though it 
is easily defined and seems a simple thing, becomes of great 
magnitude when we begin to inquire into the philosophy 
of its existence, into all the relations to which it gives rise 
between the governing and the governed. It is a question 
of supreme importance, of far-reaching consequences. 
As Ely well says: " Taxation may create monopolies, or it 
may promote labor or equality of rights, or it may tend to 
the establishment of tyranny and despotism; it may be 
used to bring about reform, or it may be used to aggravate 
existing grievances and foster dissensions between classes; 
taxation may be so contrived by the skillful hand as to give 
free scope and every opportunity for the creation of wealth 
or for the advancement of all true interests of states and 
cities, or it may be so shaped by ignoramuses as to place a 
dead weight upon a community in the race for industrial 
supremacy." 

Taxes, then, have for their purpose the general good of the 
community, and so long as they tend to give this and are 
levied with a fair measure of equality, they subserve their 
purpose and affirm their right to existence. When taxes 
are once paid into the treasury of the government, their 
disbursement may take place, not only for the expenses of 
the government machinery, but also for the protection of 
industries as a means of directing society in certain chan- 
nels, and for general public improvement. The whole 
community is to be benefited, directly or indirectly. 

393 



ECONOMICS FOR HIGH SCHOOLS 

329. Canons of Taxation. — Although taxation is com- 
paratively modern, we have found that systems have de- 
veloped along with the progress of modern government. 
They have been practiced long enough to develop a cer- 
tain number of principles which lie at the foundation of the 
philosophy of good government. 

Many of these principles were advocated by Adam Smith, 
and have been reiterated by all writers on taxation from 
his time. The first general principle is, that the subject 
of every state ought to contribute to the support of the 
government as nearly as possible in proportion to his 
respective ability, this ability being estimated by the 
amount of revenue he enjoys under the protection of 
the state. And by this last sentence it is understood 
that, living within and under the protection of the state, 
the amount of revenue which he enjoys is to be an index 
of his ability to pay for the support of the general 
good; or, as Mill says, '*EquaHty of taxation is equality of 
sacrifice." 

People, as a rule, do not like to be taxed, because they 
do not receive an immediate and tangible return for what 
they pay out, as they do in the case of the exchange of com- 
modities. The return which they get is, indeed, very gen- 
eral and indirect. But there is an indirect return through 
the general good of society, of which the individual tax- 
payer is a member. 

They also object to the payment of taxes because they 
imagine that they are unjust. And, indeed, no one ever 
knew a tax without a grain of injustice. John Sherman 
said in one of his speeches in the Senate, " I never knew 
a tax that was not odious and unpopular to the people who 

394 



TAXATION AND REVENUE 

pay it;" while Mr. McCulloch has succeeded in utilizing 
two of Pope's lines as follows : — 

" Whoever hopes a faultless tax to see, 
Hopes what ne'er was, is not, and ne'er shall be." 

And doubtless this is a successful application of poetry to 
economics. But still, Sherman's strong assertion needs 
some qualification, for there certainly is a difference be- 
tween a popular and an unpopular tax; and while no one 
really enjoys taxation, not all taxes are odious. But the 
liability to fraud leads a man to imagine that he is paying 
more than he ought, and that there is a way of escape. This 
causes dissatisfaction, and a tendency on the part of many 
to evade taxation. However, it should be stated that a tax 
should be quite satisfactory to the people who pay it, and 
should be so assessed as to give the least possible oppor- 
tunity for fraud. 

Another well-known principle is, that taxes ought to be 
certain, and not arbitrary, as to quantity, time of payment, 
and manner of payment. In feudal times, and sometimes, 
indeed, in modern history, the principles of taxation have 
been violated in this respect. Kings and potentates have 
levied taxes suddenly, and without warning, and collected 
them in an arbitrary and offensive manner, thus violating 
this principle. But modem assessments have tended to 
recognize all of these principles, as to the certainty of taxa- 
tion and a fixed time of payment, and have specified clearly 
the manner in which these taxes must be paid. 

A third principle is, that taxes ought to be levied in the 
manner most suitable to the payer; that is, the time and 
manner of payment should be as best suit his convenience. 

395 



ECONOMICS FOR HIGH SCHOOLS 

The preceding principle holds to the definiteness of proce- 
dure, while the latter holds that this definiteness should 
be so arranged as best to suit the convenience of the tax- 
payer. Thus, it is more convenient for the farmer to pay 
his taxes soon after he receives returns from his harvested 
crops ; persons receiving wages by the week or by the month 
could more readily pay their taxes quarterly; and a day 
laborer finds the most convenient tax to pay is that which 
he pays daily through a tax on commodities. Generally, 
enlightened nations are beginning to observe this rule to 
a considerable extent, for we find that the convenience of 
the taxpayer is consulted in the times set for the payment of 
taxes. 

One of the most important of the principles of taxation is, 
that taxes ought to take as little as possible out of the pocket 
of the taxpayer over and above what is paid into the public 
treasury. This is an argument in favor of the careful ex- 
penditure of funds, as well as the proper method of assess- 
ment and collection of them. An improper tax may lead 
to great injustice by taking unnecessarily from the pockets 
of the people what ultimately reaches the treasury, a sur- 
plus that is expended in the collection of the tax, or that 
reaches the pocket of corrupt officials. Or, again, if a 
greater assessment is made than is required to meet public 
needs, it results in heaping up in the pubhc treasury a large 
amount of funds, which may lead to extravagance, and, in 
turn, to injustice. 

The economic idea of taxation is, that the fund collected 
as tax is to be more profitably expended by the government 
than it would be if left to private enterprise. Being drawn 
from the combined earnings of all the citizens, the tax is 

396 



TAXATION AND REVENUE 

to be so handled that it will yield a larger economic return 
than the tax itself; and also a larger return than the money 
would yield if handled in small amounts by the individuals 
themselves. Sometimes taxes have been so heavy as to be 
little better than robbery. So much was taken out of the 
pockets of the people that it burdened the industries which 
they tried to carry on, and thus the taxes were a positive 
detriment to the entire community. But in this connection 
it may be said that the least tax is not always the best tax; 
for, while it is a very bad plan to have an extravagant tax, 
a niggardly tax which barely supports the functions of the 
government is a detriment to the progress of the people. 
Correct financiering will avoid an overflowing treasury 
and a lavish expenditure, or a government bordering on 
paternalism, on the one hand; and on the other it will avoid 
an empty treasury, and a meager outlay that barely keeps 
the government in a poor existence and does nothing for 
the general welfare of the people. Thus, the building of 
bridges, public parks, and highways, the development of 
the systems of supervision and inspection which enhance 
the power of economic society, can all be carried on better 
under the direction of the general government than they 
would if left to the haphazard, irresponsible, irregular ways 
of individuals. 

330. Just and Equitable Taxation. — A great deal has 
been said about just and equitable taxation. And these 
indefinite terms have led to a large measure of senseless 
discussion. Doubtless a just and equitable taxation is the 
one least burdensome, although these taxes cannot fall 
equally upon all individuals. There must be discrimina- 
tion. The basis of operation should always rest upon 

397 



ECONOMICS FOR HIGH SCHOOLS 



equality of sacrifice, and should never involve unnecessary 
taxation of any one. It is said that there is a tendency in 
taxes to move along the line of least resistance; which, if 
it be true, means that somebody pays more than his share, 
while others escape. Owing to the nature of taxation, 
it having sprung up irregularly through the development of 
society, it has been a very difficult matter to adjust it so 
that each one should bear his own proper share of the ex- 
penses of the government. Taxes were first paid by the 
weak, or those unable to resist them. Indeed, to-day it 
may be said that of all the great questions before the Ameri- 
can people, that of equal and just taxation is the greatest. 
Our system has been in confusion for a period of years, and, 
as time develops, we see very little order coming out of the 
chaos. We need a thorough revision of our tax system, 
which shall combine harmony, simphcity, and proper dis- 
crimination in all assessments and levies. 

331. Incidence of Taxation, — A subject which has 
caused a great deal of discussion in the theory of taxation, 
and about which there is much controversy to this day, 
as it is still an unsettled question, is that of the " Incidence 
of Taxation." By it we indicate or determine upon whom 
the tax ultimately falls. A tax is sometimes levied upon 
one person and seemingly paid by him, but in reahty has 
been shifted to another; and the incidence of taxation 
answers only one question ; viz., Upon whom does the tax 
ultimately fall ? A tax may be borne by the person upon 
whom it is levied, or it may be shifted to others, who in 
turn may shift it to a third party. And this shifting may 
be done either knowingly or unknowingly by the person 
who shifts. We should carefully discriminate between shift- 

398 



TAXATION AND REVENUE 

ing and evasion, for evasion is simply a failure to pay a tax 
at all by avoiding it, while shifting is the process of referring 
the tax to others to pay. But in this respect v^e do not at 
all consider the effect of taxation, but merely upon whom 
the taxes fall. It is, then, a question of great importance, 
for indeed upon it the whole theory and practice of modern 
taxation rest. 

The theory was discussed as early as 1651 byHobbes,inhis 
" Leviathan," who advocated a general excise, so that those 
who paid taxes would not feel them a burden, not knowing 
when they pay them nor how much they pay. And Cra- 
dock holds that taxes should fall so that the burden will be 
borne insensibly by the taxpayers. And Thomas Mun, 
in 1664, held that in proportion as the necessaries of life 
increase in value, so the rate of wages will rise, and taxes 
will be shifted accordingly from the wage-earner to the 
employer and the rich. Sir William Petty held, in 1672, 
that under such circumstances the employing producer 
will bear the taxes because the incidence falls on him. The 
question received much discussion from time to time, and 
has been revived of late by Seligman, Ely, Ross, and 
others. A careful inquiry into this principle will show us 
that many of so-called direct taxes may in time be shifted, 
as are the so-called indirect taxes; so that really the dis- 
tinction between direct and indirect taxes is largely in the 
mind of the legislator as to what he intends shall be direct 
and indirect, rather than in the practice of the tax itself. 

The poll, or capitation, tax must fall upon the individual 
upon whom it is laid, and cannot be shifted, except when 
it falls upon the wage-earner, and then it will not be shifted 
unless it falls upon the margin of his necessary subsistence. 

399 



ECONOMICS FOR HIGH SCHOOLS 

That is, when wages are below the nominal rate and taxes 
are laid upon wages, they will be shifted to the employer; 
when wages are above the nominal rate, taxes upon the 
wage-earner will be borne by him. 

Taxes upon inheritances and bequests cannot possibly 
be shifted; the property is in sight, and it must yield to the 
return of the levy. An internal tax may or may not be 
shifted, though in the greater majority of cases it is shifted 
in whole or in part. The tax on imports is generally called 
an indirect tax, and as a general rule it will be shifted in 
whole or in part, although exact determination will depend 
upon each individual case. The tax on monopolies cannot 
be shifted, except in special cases. 

The income tax, though a direct tax in theory, may fre- 
quently be shifted to others. Take, for example, the in- 
come tax of England, which is a combination of taxes on 
separate categories of income, and it happens that it is 
merely a tax on gross revenue or gross receipts ; and in such 
cases it is generally true that the income tax follows the 
movement of other taxes in regard to incidence. In a case 
where a tax is laid on pure income, it is really a tax on 
economic rent added to the tax on net profits and the tax 
on wages. Now, we know that taxes on economic rent 
and net profits cannot be shifted, except in the case of 
wage-earners, and it will have a tendency to stay where it 
is placed in regard to wage-earners. Nevertheless, these 
are only tendencies, and we have no absolute assurance that 
an income tax in a country where we find no pure income 
will remain where it is put. 

Now, the difficulty in all taxation is not found in the fact 
that some taxes can be shifted and others cannot, but it is 

400 



TAXATION AND REVENUE 

in knowing just when taxes will be shifted and when they 
will not, so that we can understand upon whom the taxes 
will fall, and thus double taxation and unjust levies be 
avoided. If a person desires to reach certain members of 
society directly, let him choose the group of taxes including 
those on monopoly, net profits, inheritances, and certain 
forms of property and income. If he desires to reach per- 
sons indirectly and have taxes paid unawares by the payer, 
let him choose taxes on commodities, in the shape of im- 
port duties, special excise duties, licenses, and taxes on gross 
receipts and corporations. 

332. Classification of Taxes. — Perhaps, before we go 
farther into this discussion, it will be a good plan to out- 
line briefly the various kinds of taxes in common use in our 
country, and generally throughout other countries. The 
first great division of taxes is in respect to direct and indi- 
rect taxes. It must be stated that this classification is of 
comparatively httle value as the incidence of taxation be- 
comes better understood. It is of more difficulty to deter- 
mine what is a direct tax. 

Direct taxes are said to be less expensive than indirect. 
In 1 88 1 the cost of collecting the taxes on commodities in 
the United States was estimated at 5.13 per cent, while the 
cost of raising the revenue from direct taxes in 1876 was 
3.5 per cent. In 1883 and 1884 the cost from direct taxes 
was 7 per cent, while those revenues from indirect taxes 
had fallen in cost to g^ per cent. In Prussia, in i860, the 
direct taxes cost 4 per cent and the indirect taxes, with the 
exception of the salt monopoly, cost 12 per cent. 

Poll Tax. — The poll tax, as is indicated by its name, 
falls upon the individual. It is an old form of taxation, 
2 D 401 



ECONOMICS FOR HIGH SCHOOLS 



arising from feudal times out of service to the feudal mas- 
ter. There is a renewal of this old-time service when the 
commissioner summons me to appear on the street at a cer- 
tain hour of the morning with a shovel to work out my 
road tax; it is a reminder of the old feudal regime. 

A great many object to the poll tax because if a person is 
poor and unable to pay it, there is danger of his being 
reduced to poverty and then relegated to the ranks of 
paupers and criminals. It is idle to collect taxes of this 
class to keep up almshouses and prisons, while we are 
making the class larger all the time by so doing. While 
there is a grain of sense in this, there is another side to 
the subject. Taxation, when not excessive, stimulates pro- 
duction rather than represses it. There is a happy mean 
to be maintained in all transactions. Productive enterprise 
will be enhanced, and capacity for economic production 
will be made greater, and by the use of moderate taxation 
one will redouble his energies. Then, there is a question 
of citizenship, namely, that a person who is not frugal 
enough, industrious enough, and manly enough to earn 
two or three dollars a year to pay for the privilege of 
citizenship has no right to be a citizen. If taxation with- 
out representation is tyranny, taxation is also a badge of 
liberty, which every man should bear in some form or other. 
It is true, you say, he does bear that in the taxation on 
commodities. To a certain extent that is true. Neverthe- 
less, it appears to be a good thing if he be summoned by the 
proper authorities to " appear with a shovel," that he may 
understand that there is a government over him whose 
interests he is bound to respect. 

Income Tax. — The income tax is, theoretically, the most 

402 



TAXATION AND REVENUE 

nearly correct tax that we have, but yet the most difficult to 
collect. It falls upon the net income of individuals, and 
therefore fulfills the canon which requires the tax to vary 
according to the revenues which people enjoy. If a man 
has no income, then he will have no tax; if his income 
becomes greater, his taxes become greater accordingly; 
if his income declines, his taxes decline also. The diffi- 
culty has been, that in practice the tax does not vary 
so much with the rise and fall of income as with the ability 
and inclination of the payer to evade the tax. Our expe- 
rience with the Federal Income Tax, from 1861 to 1872, 
a period of ten years in actual operation, was very unpleas- 
ant. It came upon us suddenly, as an episode and as a 
war measure, and was to be only provisional. During its 
whole existence the laws were modified each year by 
Congress trying to readjust matters so that the tax might 
fall with equal justness upon all and without complaint. 
The income tax failed because it did not have a fair trial; 
because it was poorly managed from the beginning; be- 
cause there were those who disliked it on account of its being 
too just for them; and finally, on account of the unwilling- 
ness of persons to give proper returns. 

The income tax has been tried in a mild way in Pennsyl- 
vania and, in other states, but it has never gained a great 
success in America. However, we know that it has been 
successfully tried in Prussia, in Switzerland, and in Eng- 
land. In England it is a part of the general system of taxa- 
tion. It was introduced in 1 798 by William Pitt as a war 
measure, and intended to remain only during a short time. 
It gradually grew into the English system, and though the 
same complaints of unjustness are urged against the tax 

403 



ECONOMICS FOR HIGH SCHOOLS 

as ever, it is still retained as a part of the system, and prob- 
ably will be on account of its general easy management. 
The English income tax is based upon what is known as 
the sliding scale. 

A few years ago a new income and property tax was 
established in Switzerland, in the canton Vaud. Since then 
it has been developed in other cantons of Switzerland. All 
real property is divided into three grades. For all estates 
whose capital, maximum value, is $3000, the rate of taxa- 
tion is I per cent per thousand; maximum capital $20,000, 
rate i|- per cent per thousand; on all capitals exceeding 
$20,000, the rate is 2 per cent. Personal property also is 
divided into seven grades, and assessed at i, i J, 2, 2^, 3, and 
3|- per cent per thousand for respective grades. Incomes 
are divided into seven classes, and $80 is subtracted from 
the income for every dependant upon that income before the 
tax is levied. Thus a man who has ten children and $1000 
income would have to pay a tax of fifty cents, while a 
bachelor with the same income would have to pay a tax 
of $15. 

The general arguments used against the income tax for- 
merly in force in the United States are as follows : — 

First, it was claimed to be unconstitutional; 

Second, it required government inspection of private 
interests ; 

Third, as improper returns were given, it led to dis- 
honesty and to an unjustness of taxation; 

Fourth, it discriminated between persons having large 
and those having small incomes; 

Fifth, it was an odious tax, hated by the people; 

Sixth, it was an expensive tax. 

404 



TAXATION AND REVENUE 

There is not sufficient space to discuss all of these various 
objections. It is pertinent to say that the party which 
objected so strongly to the income tax during the war, 
subsequently undertook to place it in practice again. Its 
constitutionality has been twice decided : once in its favor, 
and more recently against it. That it was obnoxious and 
evaded, no one can deny; but that it did not have a fair 
trial and was not properly managed, is easy to affirm and 
prove. Doubtless, it was one of the least injurious taxes 
levied during the war, and, with the exception of the tax 
on national banks, it was the cheapest tax levied. The dis- 
crimination of this tax was not greater than is now found in 
the personal-property tax of to-day, and a careful examina- 
tion into our own real-property tax will show us that the 
latter has many evils attributed to the income tax. Yet the 
experiment in the time of a great war, when all is confusion, 
is not a sufficient test of the effectiveness of any method of 
taxation. However, it appears to me that if we return to 
the income tax, it should enter permanently into our system 
in harmony with other taxes, not to be used as a temporary 
affair for the raising of funds for a few years. 

Real-property Tax. — The real-property tax is one of the 
oldest known taxes. Taxes upon real property, or immov- 
able property as it is called in Europe, means taxes on 
lands, houses, mills, factories, etc. 

There is one great advantage of the real tax, that the 
property upon which it is assessed is always displayed; it 
can be found and recounted — and this has led us to think 
that it is more nearly just than any other. But a careful 
study of the property tax in America leads us to discover 
many errors and unjust discriminations. Compare the 

405 



ECONOMICS FOR HIGH SCHOOLS 

estimation of property and taxes levied in any county with 
other counties of the state, and also with other states from 
the Atlantic to the Pacific, and such a variety of assess- 
ments and rates is indeed astonishing. There are many 
cases, too, of actual fraud, where a certain man of a good 
deal of power and influence has his taxes set at a certain 
rate. A new assessor being elected, desiring to make all 
things equal, raises the assessment a little. The result is, 
the wealthy man goes before the board of equalization and 
has it reduced to what he terms its proper proportion. 
A few examples of this 'kind serve to relegate such an 
assessor to the background in politics. 

Personal-property Tax. — The personal-property tax, 
which has been so long in vogue, is doubtless as difficult to 
assess as is the income tax. It is difficult to-day for the 
assessor or for the person who makes the returns to give 
a just estimate as to the proper assessment. The number 
of irregularities in this tax is greater to-day than in any other 
tax that we have. It is certainly the worst tax in vogue. 
But we ask, " Why is it not abolished? " For the reason 
that it is supposed to reach a certain class of property 
which cannot be reached in any other way, and if all taxa- 
tion were taken from personal property, there would be a 
tendency to turn, either permanently or temporarily, a large 
class of property into the form of what is known as personal 
property. There have been some attempts to reform 
the present personal-property tax by taxing mortgages 
and other forms of security, but as a rule they have only 
made bad matters worse. 

From 1871 to 1884 there was a shrinkage of assess- 
ment of personal property in the city of New York of 

406 



i 



TAXATION AND REVENUE 

$107,184,371; yet everybody knows that the amount of 
real property increased very rapidly during that period, 
and everybody knows that the amount of personal property 
has kept pace with the increase of real property. It is 
said, also, that in the city of Philadelphia there are fewer 
watches possessed by the private citizens each succeeding 
year. It is true that the faithful assessment and collection 
of the personal tax varies greatly in different states and 
in different towns, which shows that there is a possibility 
of improving bad taxation. Either this tax ought to be 
reformed through a better political conscience or a better 
system of public administration, or it ought to be done 
away with entirely. 

Franchise Tax. — The franchise tax is rapidly coming 
into vogue in Europe and in many of the Eastern states and 
cities. It seems to be one of the best taxes that we have 
for reaching corporations; and this does not mean that 
the corporations should pay more than their proportionate 
amount of taxes, either in this or in any other form. It is 
becoming customary to grant franchises on the agreement 
of the company to pay a certain per cent of the gross re- 
ceipts into the public treasury. These franchises are let 
for a term of years to the highest bidder. The method has 
certainly worked well. The franchise tax is in the nature of 
rent for special privileges given to a few which other citi- 
zens do not enjoy, and should therefore be levied irrespec- 
tive of all other taxes on persons or property. 

Inheritance Tax. — Another form of taxation is the in- 
heritance tax, a tax much considered in these days. There 
are some features in connection with the use of the inheri- 
tance tax that would make it necessary to use it with great 

407 



ECONOMICS FOR HIGH SCHOOLS 

discrimination. However, there seems to be no real gen- 
eral opposition to it as a theoretically good tax. There 
would need to be careful discrimination in the case where 
a man, his wife, and sons had earned the farm by working 
together cooperatively; and when he passed away, it 
would certainly be injustice to tax the farm before it could 
pass into their hands. A great many other points might be 
cited in the application of this tax where it might lead to 
injustice. There is no reason, however, why a large estate 
should, without taxation, descend to a person when not 
willed to him. 

Indirect Taxes. — The direct taxes are usually those 
levied upon commodities. They may be either internal 
revenue, or export or import duties. Indirect taxes are 
those supposed to be shifted to the consumers by the per- 
son who pays them. Theoretically, they are considered to 
violate the principle of equal taxation; to obstruct trade; 
to foster monopoly; and are congenial to despotism and 
aristocracy. This is generally said of all indirect taxes. 
But the difhcult question is, whether a direct tax or an in- 
direct tax is wanted; or which will best subserve the pur- 
pose intended. Without doubt, the best system of taxa- 
tion is a combination of the direct and indirect taxes. 
It is easy to criticise either group under present circum- 
stances. 

The most prominent indirect tax of to-day is the so-called 
protective tariff, — a tax of a peculiar nature which per- 
forms, at least in its full intent and purpose, a double func- 
tion, that of raising revenue and protecting home industry. 
This tax has been before the people for nearly a hundred 
years; it has been the greatest political war-cry ever in 

408 



TAXATION AND REVENUE 

existence. It has been magnified clear beyond its just 
proportions in its power to improve or retard industrial 
conditions. It is a question of great importance among a 
score of other important questions to be decided by the 
commonwealth. 

There is not space to enter into arguments for or against 
the tax on commodities, for protection or for free trade. 
The tariff controversy and tariff history are in themselves 
a solid year's study. Attention is called to a few prin- 
ciples which may have been overlooked in this great 
discussion. 

The first principle is, that we cannot tell what is best for 
a nation by following the examples of others. Indeed, 
we find England prospering under free trade ; France and 
Germany prospering under protection; and the United 
States has prospered under protection. It stands to rea- 
son that the United States would have prospered whether 
it had free trade or protection, and that it will prosper, 
whatever system is adopted. It is also evident that it is 
not a matter so much whether there is high protection or 
low protection, or free trade, as that it is known twenty 
or thirty years ahead what system may be depended upon, 
that people may be sure that there will be no sudden changes 
or tinkering with this great system. For, whether the tariff 
has been a detriment to the United States or not, we know 
that various changes have been wrought through the 
crooked journey over which our financial life has come, 
which have been detrimental to the progress of the Ameri- 
can people. A nation may need a tariff or it may not, 
just as a man may need an overcoat or he may not. In 
all probability he does not need an overcoat when the sun 

409 



ECONOMICS FOR HIGH SCHOOLS 

is burning down upon him and the thermometer records 
ninety degrees in the shade. 

It is sometimes held that the protective tariff improves 
the wages of the American laborer. Doubtless it has an 
indirect influence upon the laborer, but, it is to be feared, 
not just in the way in which it is sometimes claimed. In 
the past few years it will have been observed by those who 
have watched the rise and fall of wages, that this is to be 
attributed to more potent influences than that of the protec- 
tive tariff. The tariff has been entirely overestimated in 
its power to advance or retard prosperity. It is not a cor- 
rect inference that because you raise the tariff on all kinds 
of iron products, there will be a rise in the wages of the iron 
workers. Indeed, as a rule, it has not proved true. Sup- 
pose there is a rise in the tariff on woolen goods: are the 
wages of the workers in wool increased? Undoubtedly 
it is only through a general system of protective tariff, 
provided a nation is in a position to need one, that indus- 
tries may be stimulated, that a greater demand for labor 
may be created, or that a standard of living may be kept 
up which will have a tendency to enlarge the opportunity 
of the wage-earner to earn greater wages and will give 
him more ability to earn them. But this is only in a very 
general way, on the basis of a nation developing a variety 
of industries and its wealth of natural resources. 

Again, it is claimed that if an article bears a certain price 
without protection, its wholesale price will be equal to the 
flrst cost plus the protective duty. This is not always true. 
There will be a tendency for the manufactured domestic 
product to rise to the equilibrium of the imported product 
plus the duty on it ; but this point will seldom be reached, 

410 



TAXATION AND REVENUE 

on account of the competition induced by stimulated indus- 
tries. And it must be admitted that a protective tariff 
does stimulate industries. This is historically correct; 
but the question is whether it stimulates industries at the 
expense of something else or not, or whether in the long run 
we shall not be better off not to have the industry stimu- 
lated for a short time, only to pass into a period of depression 
of the whole country. 

And so we have a basis for the establishment of protection 
on equality of sacrifice; each section would be benefited 
according to the articles it has to protect. But that sec- 
tion which has no articles to protect either directly or in- 
directly may not gain much by the process. But the car- 
dinal objection is, if Cuba can raise sugar cheaper than we 
can, why not let her raise it, and we will raise something 
else in exchange for sugar? This is one of the most for- 
cible objections to the protective tariff. And it is easy to 
see that if a tariff becomes extensive, it will work a positive 
detriment by destroying our foreign trade. It is not true, 
however, that it would be better for the United States to 
raise corn and cotton and let other nations do the manu- 
facturing. That philosophy does not hold in economy, for 
there are other things to be considered in national life and 
national economy than this. (See International Values.) 
But in so far as a protective tariff is usually adjusted so 
as improperly to shut off foreign trade, it, as a rule, works a 
detriment to the nation that establishes it. 

333. Irregular Development of Finance and Taxation. — 
The development of industry has led to many changes in 
the character of property. It has brought about an in- 
crease in the number of forms in which property exists. 

411 



ECONOMICS FOR HIGH SCHOOLS 

The aim of taxation has been to reach every new kind of 
property coming into existence. Thus, in the early periods 
of the history of the nation, farming was the chief occupa- 
tion. There was a very small amount of corporate prop- 
erty, a comparatively small amount of what is known as 
personal property, in stocks and bonds and other wealth, 
and likewise a comparatively small amount in mills and 
factories. It was then a very easy matter to ascertain the 
amount of property each person had, and to assess it regu- 
larly. The property that one had represented the ca- 
pacity to pay more nearly than it does when a variety of 
property has come into use. 

In the history of the development of taxation the state 
has attempted to do justice to all in levying a tax on each 
separate kind of property. It has resulted in a great 
many irregularities of taxation. While it has led to double 
taxation in many instances, it has also allowed certain 
kinds of property to escape paying their just proportion of 
taxes according to capacity. There has not been a syste- 
matic plan prepared for general taxation on a basis of the 
incidence of taxes. When a tax is once levied and col- 
lected on a given property, it is not easy to dispose of it or 
to change it for a tax of another kind; and the attempts 
made have been isolated and fragmentary legislation, which 
have tended to confuse matters more than would have been 
the case had the subject been approached in a more ra- 
tional manner. As you cannot touch one method of taxa- 
tion to reform it without interfering with the whole tax 
system, reforms in taxation should be in charge of a com- 
mission which would systematically study the effect of every 
kind of tax in the state, ascertaining carefully who really 

412 



TAXATION AND REVENUE 

bears the burden of taxation. While every one feels the 
need of a reform in taxation, we perhaps shall never reach 
rational improvement until we go to work systematically 
and reform the entire system. 

334. Imperfections of Modem Taxation. — The im- 
perfections of taxation have arisen largely in the attempts 
of the government to reach all forms of property, on the 
one hand, and the attempts of people who possess the 
property to evade or to reduce taxes, on the other. The 
system of rational taxation based upon capacity or equality 
of sacrifice has been departed from to a great extent. Many 
of the principles of taxation have been violated. 

Again, taxes have been collected for the purpose of carry- 
ing on public functions which might well have been dis- 
pensed with. Accompanying the expansion of industry 
has been the expansion of government. While the essen- 
tial functions of government have remained steady, de- 
manding an increasing amount of expenditure instead of a 
decreasing, other and new functions have been added to 
the government, which have added to the burdens of the 
people. Even when it is correct in theory and principle 
and general expediency to introduce new duties of govern- 
ment, these new duties often have not yielded any adequate 
return to the people for a number of years, and in the at- 
tempt to expand the service of the government of the people 
many things have been tried which have been a positive 
waste to the community. Many difficulties of assessment 
have also arisen to increase the evil conditions of the case. 
Fleeting forms of property have led to a pursuit by the 
legislator and the tax-gatherer which has increased the 
imperfections of the system. 

413 



ECONOMICS FOR HIGH SCHOOLS 

335. Methods of Collecting Revenues, — From the early 
history of this nation we have collected the national revenue 
largely from a tariff on imports. This has nearly always 
been accompanied by a plea for protection to American 
industries. While it has cost the people an enormous 
amount in proportion to the revenue, it still has been quite 
satisfactory to them as a method of raising revenue. The 
evil condition of it, so far as a system of finance is concerned, 
is in the fact that in attempting to gain the largest revenue 
out of it injustice may be done to certain classes of indus- 
tries or certain sections of the country. On the other hand, 
in attempting to protect certain industries or sections of the 
country, the revenue may be small and inadequate. Yet 
this tax has grown historically into the nation, and is such 
a power in the development of the industry of the country 
that it is likely to be retained in the United States, although 
many times it may be detrimental to the best interests of 
the country, so far as commerce and the rational develop- 
ment of industry are concerned. 

The tax on home products, which is also a tax on con- 
sumption, has long been a means of raising the public 
revenue. The tax on beer, liquor, tobacco, etc., seems to 
have become a means of raising revenue. There is no real 
reason why such commodities should be singled out of all 
others and taxed, except it is an easy way of taxation, and 
also aims at a luxury and an evil. It is difficult to ascertain 
the real influence of such a tax in suppressing evil, for it 
leads to adulteration of goods and falls heavily upon con- 
sumers, many of whom are among the poorer classes of 
people. 

New taxes, such as the franchise tax, largely in munici- 

414 



TAXATION AND REVENUE 

palities, and the inheritance tax in states, have come 
gradually into use. The old tax on property has been 
a prominent factor in our system, although abandoned 
in nearly every other nation in the world. While we 
have recognized the shifting of property to other forms, 
we still cling to the old form as a necessary means of 
raising revenue. So far as land is concerned, no better 
tax will ever be found; but the taxation of improvements 
and personal property becomes more irregular every 
year of its existence. 

336. Double Taxation. — The attempt to tax property 
in a variety of forms has led to much double taxation. 
Thus, when a state taxes the land and the mortgage and 
the money lent on the mortgage, there is double taxation, 
and in some instances triple taxation. The mortgage was 
a new kind of property, and it was felt that the burden 
of taxes was falling upon the borrower and owner of the 
land, and not upon the lender of money. As the person 
who holds the mortgage generally shifts the tax upon the 
borrower, the latter pays the tax on his mortgage. And 
then, if he takes the money and puts it in improvements 
or stock on his farm, he pays taxes on that again. The 
man who has property in sight almost always does the 
heavy paying of taxes. The attempt to tax the income of 
a property, with an additional tax on the property itself, 
is another form of double taxation. Also, if a man is 
conducting business, and his property is taxed, and then 
a tax is levied upon his business, he is taxed doubly. 
There can be nothing absolutely wrong in taxing the same 
person for the same thing in two different ways, but it 
leads to injustice if it develops a looseness of taxation 

41S 



ECONOMICS FOR HIGH SCHOOLS 

which leads to inequality. When only a part of the people 
are thus taxed, and others go free, injustice arises. 

It is wrong not to tax mortgages when a man's prop- 
erty is nearly all vested in them. Yet, as it is possible 
for him to shift this tax upon the mortgagee by charging 
him a higher rate of interest, it is idle to tax him. The 
property must be taxed in some other way, namely, that 
of income. A direct, income tax, properly classified, 
cannot be shifted. The question of debts in taxation is a 
grievous one. A man must be taxed, however, upon 
what he has, and not upon what he has not. The rational 
way of considering the taxation of mortgages is as follows : 
If the assessed valuation of a given farm is $4000 and 
there is a mortgage on this land of $2000, it is evident 
the property in the land represents the entire property 
in question, on the supposition that half of the value is 
covered by the mortgage. Now all of the tax may be 
levied on the land and allow the mortgage to go free, or 
all of the tax may be levied on the land and allow the 
mortgage to be taxed in addition, or allow half of the tax 
to be levied on the mortgage and half on the land. 
There is no doubt that the latter method is the logically 
correct and just one; but wherever it has been tried it 
has proved detrimental to the borrowers, and those who 
borrow have been obliged to lose the amount of the tax 
in another way. 

Another difficulty arises in the constant shrinkage of 
the value of land. If the value of the land declines one 
half and the mortgage be assessed at its full value, the 
mortgagee will be paying more than his proper proportion, 
unless he can shift it. The only way would be to assess 

416 



TAXATION AND REVENUE 

the land at its full market value and then to insist that he 
pay a just proportion, or to put the mortgage in an entirely- 
different category and tax the land on its full valuation. 

337. Taxation of Corporations. — Double taxation is 
more readily shown in the history of corporation taxes 
than in any other way. It illustrates the attempt of a 
tax to adjust itself to new kinds of property while still 
chnging to the old systems of taxation. In the early 
history of the United States, the corporations were so few 
that when they did come into existence they were not 
noticed as having a special form of property. Finally, 
they were treated as individuals under the general-prop- 
erty tax. But as time passed on it was realized that in 
the form of improvements, bonds, stocks, fixtures, etc., 
corporations had a variety of property which was not 
reached by the ordinary property tax. 

To meet these various forms of property, commissions 
for the taxation of transportation companies in certain 
states have been established. Corporations have been 
taxed by different methods in different states, according 
to the principles of taxation prevailing in those different 
states. 

The taxation of property has gradually given way to 
the taxation of certain forms which represent their tax- 
paying capacity. Among these forms we find: first, 
valuable property; second, franchises. These taxes may 
be estimated on cost of property, capital stock at par 
value, capital stock at market value, capital stock plus 
bonded debt at market value, capital stock according 
to dividends, capital stock plus total debt both funded 
and floating, gross earnings, net earnings, bonded debt 

2E 417 



ECONOMICS FOR HIGH SCHOOLS 

or loans, business transacted, and dividends. These 
various methods of attempting to reach taxable property 
of corporations have caused confusion on account of 
irregularity within the state, and especially because vari- 
ous separate states have different methods of taxation 
which greatly interfere with interstate property and non- 
resident property holders. It has led to double taxation 
in no less than five different ways. 

The importance of taxation of corporations is then 
very great. If the principles of the old property tax are 
to be maintained, they must be treated differently from 
individuals. If local taxation is to prevail, it should 
rest upon real estate only. A franchise tax of a certain 
per cent of the gross earnings of the corporation paid into 
the public treasury should be a constant factor in the 
taxation of all corporations, for the reason that they, 
having frequently special privileges granted them by the 
people, should thus make a public recognition of the 
same. Over and above this, a tax on their capital and 
loans might be a means of reaching all the paying capacity 
of the corporation. If the property is taxed, the capital 
stock should go free, and if a tax is placed upon loans, 
then no tax should be laid upon bondholders. 

Interstate agreements should be made concerning 
interstate corporations, so that the residence of the share- 
holders or bondholders would be immaterial, and arrange- 
ments made so that taxation of property in one state would 
not be duplicated in another. By some process of this 
kind, possibly there might be a rational system for the 
taxation of corporations; but even that will be found 
inadequate. 

418 



TAXATION AND REVENUE 

338. Single Tax. — ^To get rid of the confusion of tax- 
ation with all of its irregularity and waste, many people 
have advocated a single tax on land values. This has 
many advantages : in its simplicity, — the land is always 
in sight and it can be easily assessed; second, a tax on 
the economic income of land cannot be shifted. The 
taxes would be taken off all improvements and personal 
property, which would give an impetus to all industries, 
would develop the soil, and would have a tendency to 
bring into use all vacant land. This, in the long run, 
would increase the value of all other business. 

But the defects of the system are evident in the fact 
that no single tax on any form of property is sufficient 
to meet the variety of forms of property existing in modern 
times. Hence this tax cannot be advocated as a cure-all 
for all the evils of taxation. 

The irregularities of the property tax, as seen in the 
assessment of real estate and also in the returns of per- 
sonal property, insist that there must be a change in the 
former and an abolition of the latter. It is one of the 
discouraging features of our progress that, as soon as 
a man puts forth extra energy, endures special sacrifices 
to put in a form of machinery, to build a house for the 
protection of his home and family, adds stock to his 
farm, or new machinery for its better tillage, the assessor 
immediately appears upon the scene and rewards him 
for his improvement of the country by laying an extra 
burden of taxes upon him. Every one knows that the 
improved home, the improved machinery, and the large 
amount of stock on the farm will not only bring benefits 
to the person Vho establishes it, but will lead to a largely 

419 



ECONOMICS FOR HIGH SCHOOLS 

increased social benefit. In coming to the point of a 
rational system of taxation, we must insist — first, that 
it shall be simple; second, that it shall be so arranged 
as to reach the entire tax- paying capacity of the individuals 
of the community. 

339. Land and Income Tax. — Perhaps the simplest 
method of reaching the taxing capacity of a community 
is in a combination of the land and income taxes, — assess- 
ment of land at its full valuation determined by its 
economic rent, or, as is commonly known, a tax on 
land values. It is simply an estimation of the value of 
land shown by the income over and above the cost of 
production. Let this assessment be carefully made. 
Exempt all personal property and goods from taxation, 
and then place a tax on incomes from whatsoever source, 
except that of land, and all forms of property will be 
reached. In the taxation of incomes a careful classifi- 
cation of the income, from whatever source, should be 
made, and the tax should be graded so as to meet all 
forms of income according to sources. Thus, a classifi- 
cation of salaries, of incomes from manufacturing, mer- 
chandising, stocks and bonds, etc., should be made. 

As before noticed, we have in combination two forms 
of taxation, — one the easiest to assess and collect, and 
the other the most difficult. But when reduced to a 
system, the income tax could be more readily collected 
than the present general-property tax, excepting the tax 
on land. The great difficulty with the income tax, as 
levied in the United States, is that it has been in addition 
to other forms of taxation, which has led to a seeming 
injustice. This form of land and income taxation has 

420 



TAXATION AND REVENUE 

been successfully used in New Zealand, and in the first 
year of its trial the same amount of revenue was raised 
as had formerly been raised with the various methods 
employed, and with greater justice than previously. 

340. Inequitable Assessment. — With this method we 
should lose all of the inequality of assessment which now 
pertains to the personal-property tax. We also should be 
obliged to enforce an equity of assessment of real estate 
which does not now exist. Though land is in sight, there 
exists the greatest inequality of assessment and taxation. 

The first principle of reform should be to insist that 
land should be taxed at its full market value, or with a 
reference to the economic rent of such properties and 
with the elimination of the element of improvements, 
and thus assessment could be more readily determined 
than is usually supposed. As soon as we depart from 
the actual value of property as a basis of taxation, we 
begin to develop irregularity and injustice in assessment. 

341. Methods of Collection. ^ — ^One of the prime 
methods of economy in a financial system is to have 
taxes regularly collected. Although not so difficult as 
the assessment, it is essential that the collection of taxes 
should conform to business methods. In the case of 
the income tax, should it ever be established as a state 
institution, its collection should be arranged so as to 
cause no extra expense. Taxes should be paid directly 
into the hands of the county treasurer for all purposes, 
and this treasurer should be custodian of all funds, — state, 
county, district, or township, — except certain funds col- 
lected on account of the state, which should be paid over 
into the state treasury. 

421 



ECONOMICS FOR HIGH SCHOOLS 

One of the defects of the tariff is, that it is difficult to 
collect the tax. Our customhouses have been among 
the most difficult agencies to maintain in the United 
States. Nor is that all. When the tax has been properly 
collected at a great expense, the consumer must pay it 
at an increased expenditure. This makes it difficult to 
insure justice. The old system of collecting taxes, by 
sending to the individual an agent who received a com- 
mission for his services, has been largely dispensed with. 

342. Public Expenditures. — Usually the expendi- 
tures from the pubhc treasury are classified into those 
that go to the support of the government and those paid 
directly to individuals. By the support of the govern- 
ment is meant not only the payments for the running of 
the government machinery, such as the salaries of certain 
officers and the expenses of their offices, but also those 
funds that are paid out for the general welfare of the 
community, irrespective of any persons or classes of people. 
The other group of expenditures is represented in such 
as are dispensed for charity, pensions, and individual bene- 
fits. This classification, however, is not wise, if we wish 
to grasp the full meaning of government. 

We find that there are certain functions of the state 
essential to its maintenance. Among these are the keep- 
ing of order and the protection of property and persons; 
all regulations concerning the possession, transmission, 
and exchange of property; the definition and punish- 
ment of crime; the establishment of contract rights; 
the administration of justice; the definition of political 
duties and privileges; the determination of the relations 
of citizens; the maintenance of the autonomy of the 

422 



TAXATION AND REVENUE 

state in dealing with foreign powers. Without these 
functions a state cannot be said to exist, for it is in the 
administration of these that a people is entitled to the 
right to be called a state. The minimum of expenditures 
for a state or government must be in providing for and 
carrying out these principles of government. 

Starting from this point, a government may add any- 
thing which the majority determines shall be for the 
general welfare. There is no limit to the powers of a 
state controlled by the law of the people, except what 
the majority cannot do, — that is, the impossible in gov- 
ernment. Among optional duties and services of gov- 
ernment may be named the following: education; care 
of the poor and incapable; regulation of labor; main- 
tenance of systems of transportation and communica- 
tion, such as railroads and postal and telegraph systems; 
the manufacture and distribution of public utilities, 
such as water, gas, etc.; the regulation of industries and 
trade; improvement of sanitation; cultivation of forests 
and land; care of fish in rivers; and finally, the regula- 
tion of the consumption of food and drink. As there is 
practically no limit to what a state may vote to do for 
the people, there can be no limit to their expenditures; 
therefore it is wisely provided that all expenditures shall 
be determined by the representatives of the people. 

Sometimes charities have been classified as personal 
expenditures. It is true that the expenditures apply to 
certain persons, but it is for the benefit of the public. 
Education applies to certain persons, but it is for the 
benefit of the public at large. While we establish prac- 
tically free education, the limitations of individuals are 

423 



ECONOMICS FOR HIGH SCHOOLS 

such that many are deprived of exercising the privilege. 
While we vote funds to help the poor, insane, and blind, 
it is merely as a public function and not as a charity. 
The state is merely seeking to preserve itself in the care 
of these individuals. The same may be said with regard 
to the expenditures for penal institutions. While we 
may attempt to reform criminals, it is not so much for 
the benefit of the individuals as for the state at large. 
As far as the state itself is concerned, it has no right to 
expend anything for individuals. Its final aim must 
be its own preservation and the welfare of the public at 
large. 

The expenditures for pensions cannot be considered a 
charity. That is, were there nothing else involved in 
it than the bare help of individuals, the state would have 
no right to grant pensions. But it is as a method of pay- 
ing those who will risk their lives for a state that pen- 
sions are granted. While they appear to be given to a 
certain class, it is done for the purpose of future defense 
and welfare. Soldiers who take their lives in their hands 
to fight the battles of their country receive purposely a 
very small pay, inadequate for the time of service. Hence 
it is that the pension is nothing more than a supplemen- 
tary pay to those who sacrificed the most in the service. 
Therefore, when wisely administered, the pension system 
is valuable for the preservation of government and the 
perpetuation of liberty. The amount is only limited by 
the judicial expenditure for the welfare of the commu- 
nity. 

The chief thing to be observed in government expen- 
diture is economy. A thousand things might be pre- 

424 



TAXATION AND REVENUE 

sented which in theory might be a benefit to the people, 
but the good returning from the expenditure would not 
be equivalent to the money expended with interest on 
the same, — and this should be the basis of all expendi- 
ture. Legislators and officers seldom realize that the 
money taken from the pockets of the people to be ex- 
pended by the government should yield a return equiva- 
lent to the amount collected plus the interest on the same 
at an ordinary rate of interest. The calculation, then, 
of the social, commercial, and moral good to a commu- 
nity — in other words, the calculation of the amount of 
well-being to be gained by any expenditure — must be 
made by all officers. Well-intentioned people see things 
that would be an improvement to the community, and 
therefore advocate the appropriation of funds for this 
service, when in reality the good derived will in no way 
be equivalent to the amount of the expenditure. Here, 
as elsewhere, good business consists in keeping down 
unnecessary and unwise expenses. In ordinary business, 
many people fail because of spending their entire energy 
to the increase of income. A large proportion of it ought 
to be spent in keeping down expenses. It will be found 
that the prime principle of business success consists in 
the economy of the wealth at command, and these prin- 
ciples should extend to all public expenditures. 

343. The Budget. — Economy, then, is very essential 
in making up the budget of expenditures for every county, 
state, or government. No doubt if everything was in- 
cluded in the items of expenditure that is proposed 
each year by some legislators in the United States, our 
expenditures would be increased a hundred fold, suffi- 

425 



ECONOMICS FOR HIGH SCHOOLS 

dent to bankrupt the state in a year or two. And nearly 
every one of these propositions for the expenditure of 
money would be of more or less benefit to the community. 
But the principle would be violated that the return for 
the expenditure should be equivalent to the expenditure 
plus the interest. In making up the budget of the various 
states and of the nation, many things are included which 
cannot be embraced in the category of wise expenditure. 
Hence it is that, in making up the budget of expenditures, 
especial care should be taken to include in it only those 
expenditures which shall be productive of general good 
to the people. In private business, people limit their 
expenditures by the supposed amount on hand. In 
public expenditures, they estimate the needs of legiti- 
mate government and levy accordingly upon the people 
for payment. The principle of public expenditure, then, 
must be guarded with more care and wisdom than that 
of private business. 

344. Public Debts. —That expenditures shall not be- 
come a burden to the people, it has become customary 
to borrow money and extend payment over a series of 
years. It is done on the principle that certain improve- 
ments cannot be carried on a little at a time, year after 
year, and paid for in taxes by the people, so well as to be 
completed at once and give the people the use of the im- 
provement while they are paying for it. It is wrong to 
entail upon a single generation all the expenses of public 
improvements, sometimes desirable and necessary in a 
single year. On the other hand, the public debts should 
not be increased so as to impose an excessive burden 
upon future generations. While the principle of public 

426 



TAXATION AND REVENUE 

debt is a good one, it should be guarded very carefully 
or it may accumulate a burden upon the nation which 
eventually will lead to its destruction. Each generation 
will have its own peculiar burdens to bear, and while it 
» may be helped and given power to act by the improve- 
ments made by the preceding generations, these improve- 
ments should not be so great as to heap upon succeeding 
generations such a burden as will prevent them from 
taking advantage of the necessary improvements of their 
own times. 

The public debts of the nations of the world have become 
very great. Taking the national, state, and municipal 
indebtedness, the amount is appalling. When this ex- 
penditure has been for the improvement of the nation in 
giving it power and facility in the creation of wealth and the 
elevation of the standard of life, there can be no cause for 
alarm. When such debts have been heaped up by fruit- 
less wars and excessive armament, there must be cause 
for anxiety, though not for alarm. An estimate of 
1882 made the public debts of the principal nations 
of the world amount to about twenty-seven billions of 
dollars. 

If a modern city proposes to give its people the benefits 
and privileges of a modern government in regard to parks, 
boulevards, streets, sidewalks, waterworks, sanitation, and 
police system, there must be an enormous expenditure,^ 
which ought to be distributed over a period of years in order 
npt to make taxation become a burden to industry. If a 
city must build a public hall in a given year, it is easy to see 
that the payment of it, if raised in a single year's levy in ad- 
dition to all the other expenditures, would be an excessive 

427 



ECONOMICS FOR HIGH SCHOOLS 

burden to the people. There is only one way, and that is 
to distribute it. 

345. Imperfections of Government Machinery. — There 
is much loss in the assessment, collection, and expenditure 
of public revenue, on account of the imperfections of gov- 
ernment machinery. At best, a method of raising revenue 
and managing expenditures is expensive, but when a na- 
tion confuses its politics and its public business in such a 
way as to destroy the best principles of government finan- 
ciering, it heaps upon the people needless burdens. Every 
year men are chosen for office with no especial adaptability 
for the office except that they have gained favor in serving 
some political party or are friends to those in power. Then, 
after they have spent two or three years in learning how to 
be good financiers, we turn them out of office and put other 
ignoramuses in their places in order to educate them in their 
specialty. Nations will succeed in public financiering 
just in proportion as they cease to mix pubhc business and 
politics in the administration of affairs of state. Nor is 
incompetency the only fault. For, while government 
officials in most civilized states as a whole are honest, 
there are those who seek- public preferment for the sole pur- 
pose of exploitation of the government. The political 
conscience respecting duties to the government, which is, 
in other words, duty to the public and the people, seems to 
be somewhat warped. 

It is not, then, the amount of money collected from a 
given people that should be any cause of worry to them. It 
is the question of whether, in the assessment of taxes, in 
the collection thereof, in their expenditures, in the needs 
of government, and in the perfection of government ma- 

438 



TAXATION AND REVENUE 

chinery, great wisdom and justice are exercised on the 
part of the sovereign people. 

References. ^Taxation: Ely, R. T., "Taxation of American 
States and Cities"; Cossa, L., "Principles of Taxation"; Cooley, 
Thos., "Taxation"; Seligman, E. R. A., "Essays in Taxation"; 
Ashley, Percy, "Modern Tariff History"; Taussig, F. W., "History 
of the Tariff." Finance: Adams, H. C, "Finance"; Adams, H. 
C, "Public Debts"; Bastable, C. F., "Public Finance"; Plehn, 
Carl, "Introduction to Public Finance." 



346. — List or Subjects for Essays and Debates. 

1. Government regulation of freights and fares on railways. 

2. The economic effect of centralized industry. 

3. The economic effect of trusts and combinations. 

4. How may the government best secure for the people the bene- 

fits of monopoly? 

5. Should the municipality own and operate its waterworks and 

light plants? 

6. Should the city own and operate its street railways? 

7. Should cities adopt a system of government by commission? 

8. Should the government limit the amount of the capital stock 

and the bonded indebtedness of railways and other great 
corporations? 

9. Is the "open" or the "closed" shop preferable? 

10. If the agent of laborers contract with the employer to furnish 

a given number of men at a wage scale agreed upon, should 
the agent be held responsible for the quality and quantity 
of work done by the laborers? 

11. Should boards of trade permit or encourage speculation in 

wheat, cotton, and other farm products? 

12. What influence has labor organization on wages? 

13. Should immigration to the United States be restricted? 

14. The economic advantage of good roads. 

15. The advantage of an income tax. 

429 



ECONOMICS FOR HIGH SCHOOLS 

i6. Is the present protective tariff (1907) in the United States 
beneficial ? 

17. Should steamship lines to South American ports be subsidized 

by the Federal governments? 

18. Should the eight-hour day for all wage-earners be made 

universal ? 

19. Should the government own and operate the railways? 

20. Should the government establish and maintain a parcels ex- 



press 



21. To what extent does convict labor compete with free labor? 

22. Should labor problems be settled by a public board of arbitra- 

tion? 

23. The benefits of postal savings banks. 

24. The relative cost of living on the farm and in the city. 

25. Should the government establish wireless telegraph stations? 

26. Advantages of profit sharing. 

27. Possibilities and advantages of cooperation. 

28. Economic phases of irrigation of arid lands. 

29. Should child labor in factories be abolished? 

30. The taxation of inheritances. 

31. Should the general-property tax be abolished? 

32. What are the defects of socialism as a system of distribution? 

33. The cost to a community of change of fashions in wearing 

apparel. 

34. Should excessive interest charges be regulated by law? 

35. Competition and business ethics. 



430 



INDEX 



Abstinence and saving, 173. 

Agricultural area, 146; changes, 49; 
products, 147. 

Agriculture, beginnings of, 12; in- 
come from, 139; limited returns of, 
141; and transportation, 143. 

American Federation of Labor, 266. 

American Railway Union, 267. 

Anarchism, 292. 

Arbitration, 279. 

Aristotle, 229, 283. 

Ark Wright, Richard, 47. 

Artisan class, 10. 

Assessment of taxes, see Taxes. 

Babeuf, Francis N., 286. 

Balance of trade, see Trade, balance 
of. 

Banking, Canadian, 353; rise of , 347; 
sound system of, 348. 

Bank notes, 340. 

Bank of England, The, 348. 

Bank of France, 350. 

Banks, as business centers, 347; 
Canadian, 354; national, 350; 
organization of, 351; regulation 
of, 352; savings, 354; postal sav- 
ings, 355. 

Bastiat, F., 312. 

Bebel, A., 294. 

Bimetallism, 339. 

Blanc, Louis, 292. 

Bohm-Bawerk, Eugen V., 233. 

Brisbane, Albert, 29 r. 

Biicher, Carl, 33. 

Budget, the, 425. 

Cabet, Etienne, 288. 
Capital, accumulation of, 176; cir- 
culating, 174; concrete, 175; fixed, 

43 



174; free, 174; momentum of, 177; 
nature of, 172; pure, 175; special- 
ized, 174. 

Capital and production, 178. 

Cartwright, Edmund, 48. 

Channing, Dr. W. E., 291. 

Circulation of money, see Money, 
circulation of. 

Civilization and the land question,- 

137; 

Clothing, production of, 5. 

Combinations, 182. 

Commerce, 33; American, 71 ; French 

and English, 68; mediaeval, 60, 65; 

modern, 65 ; of ancient nations, 59 ; 

of Phoenicians, 59; recent, 70. 
Commissions, control by, 377. 
Competition, national, 67; plane of, 

ays- 
Competitive life, 76. 

Consumers' profits, 104. 

Consumption, analysis of, 106; and 
production, 100; final, 103; imme- 
diate, 103; national, 114; pro- 
ductive, 104; reform in, 116; 
waste in, 118. 

Cooley, Judge Thomas, 390. 

Cooperation, aim of, 254; distribu- 
tive, 245; in England, 247, 248; 
in United States, 251; nature of, 
245; principles of, 261 ; productive, 
246. 

Cooperative life, 78. 

Corporations, 82, 181; laws control- 
ling, 379- 

Craddock, F., 399. 

Credit, 343 ; advantages of, 344 ; and 
capital, 345; and value, 344; 
instruments of, 343; overstrained, 
346. 

I 



INDEX 



Crompton, Samuel, 47. 
Cultivation, margin of, 212. 
Currency, inflation of, 346. 

Dana, Charles A., 291. 
Davy, Sir Humphry, 48. 
Demand, and competition, 30S; law 

of, 307; market, 308; schedule, 

306. 
Desire, for clothing, 94; for education, 

95 ; for food, 94; for home life, 95 ; 

for religious culture, 96; for shelter, 

94; for social order, 9 7 ; for wealth, 

.96. 
Distribution, dynamic law of, 193; 

nature of, 189; of gross product, 

195- 

Economic freedom, 382. 

Economic goods, consumption of, see 
Goods. 

Economic life, development of, 1 5 ; 
complex, 97. 

Economic process, unity of, 121. 

Economic production, non-interfer- 
ence with, 53. 

Economic society, interdependence of, 
98. 

Economics, public, 371. 

Economy, beginnings of, 18; con- 
sumers', 25; state, 25. 

Eight-hour law, 168. 

Ely, R. T., 393, 399. 

Engel's law, 107. 

England, The Bank of, see Bank of 
England. 

Equal returns, law of, 192. 

Exchange, domestic, 359; foreign, 
360; importance of, 357; means of , 
358; organization of, 356. 

Factory life, effects of, 51. 

Factory system, 50. 

Family, the ancient, 20; the enlarged, 

22. 
Farmers' Alliance, 252. 
Farming, corporate, 150. 
Feudal society, rise of, 28. 
Finance, 83; development of, 411. 
Firm, the, 181. 



Fisheries, 155. 

Food, primitive methods of obtain- 
ing, 4- 

Forests, 155. 

Fourier, Charles, 291. 

France, the Bank of, see Bank of 
France. 

Franchises, 381. 

Free competition, 371. 

Free trade, 371. 

Fuller, Margaret, 291. 

George, Henry, 231. 

Gilds, 39. 

Goods, economic, 311; consumption 

of, 97; free, 311. 
Government, machinery of, 428. 
Grange, the, 252. 
Greeley, Horace, 291. 
Gross product, 195. 

Handcraft industries, 35. 
Handcraft system, 42; decline of, 

45- 
Handwork, supplanted by machinery, 

47- 
Hargreaves, James, 47. 
Hobbes, Thomas, 399. 
Home, self-sufficiency of, 45. 
Household, transformation of, 37. 
Houses, method of building, 6. 

"Icaria, a Voyage to," 288. 

Immigration, restriction of, 170. 

Implements, manufacture of, 8. 

Income from agriculture, 139. 

Indians, North American, 4. 

Inducements to save, no. 

Industrial classes, 38. 

Industrial transition, 36. 

Industries, general management of, 
376; of limited returns, 141. 

Industry, 33 ; and scientific discovery, 
80; organization of, 81; relation of , 
to politics, 86; restrictions upon, 

373- 
Interest, economic, 228; as factor in 
distribution, 237; effect of cheap 
money on, 235 ; legislation and, 
235; loan, 228; nature of, 228; 



432 



INDEX 



a premium on exchange, 233; rate 
of, 234; theories of, 229. 

Invention, modern, 79. 

Irrigation, 151; effect on prices, 152; 
results of, 154. 

Knights of Laboe, 266, 268. 

Labor, cooperation of, 165; division 
of, 8; grades of, 162; improved 
conditions of, 166; organized, and 
production, 186; productivity of, 
166; protection of, 167; service of, 

159- 
Labor force, extent of, 160; quality 

of, 161. 
Labor organization, 55, 83, 263, 278. 
Land, and population, 138; basis of 

production, 135; monopoly, 145; 

offices of, 136; tenure, 156. 
Land area, 142. 

Land question and civilization, 137. 
Land system, 156. 
Lassalle, Ferdinand, 293. 
Lecky, W. E. H., 304. 
Leroy-Beaulieu, Paul, 390. 
Liebknecht, Wilhelm P. M., 294. 
Lycurgus, 283. 

Mably, Gabriel Bonnot, 286. 
Machinery, economic effects of, 

148. 
Manor, transformation of, 37. 
Manorial system, the, 29. 
Market, the, 359. 
Marx, Karl, 232, 293, 312. 
Mechanical inventions, influence of, 

47- 
Menger, C, 232. 
Mercantile system, 66, 371. 
Mill, James, 231. 
Mill, John Stuart, 189, 394. 
Monetary history of United States, 

341- 
Money, 324; amount needed by a 

nation, 338; circulation of, 336; 

early history of, 324; functions of, 

332; kinds of, 331; measure of 

value, 333; multiple standard, 335; 

paper, 340; standard of deferred 



payments, 334; standard of value, 
333; storage of value, 335. 

Monometallism, 339. 

Monopoly, benefits of, see Trusts, 
323- 

National banks, see Banks. 
Nature, bountifulness of, 135. 
Net product, 188; division of, 190; 

undivided, 192. 
Non-interference policy, 53, 54. 
Normal price, 321. 

Organization, political, 186 ; private, 
180; productivity on account of, 
186. 

Ornaments, manufacture of, 7. 

Owen, Robert, 294. 

Petty, Sir William, 399. 

Physiocrats, 372. 

Piecework, see Handcraft system, 42. 

Plato, 283. 

Political economy, development of, 

S3- 
Political organization, 186. 
Power manufacture, 50. 
Price, 317; limitations of, 323; 

market, 317; normal, 321. 
Primitive man, occupations of, 3. 
Producers, 125. 
Production, character of, 122; factors 

of, 131; means of increasing, 133; 

processes of, 130. 
Profits, and market prices, 241; and 

rent, 240; competition and, 239; 

gross, 238; monopoly, 242; pure, 

238—241. 
Property, ownership of, 14; rights 

of, 202. 
Proudhon, P. J., 293. 
Public debts, 426. 
Public expenditures, 422. 

Railroads, government ownership 
of, 378. 

Reform, no formula for, 302. 

Rent, 207, 209; and cost of produc- 
tion, 214; and free land, 215; and 
prices, 213; cause of, 208; con- 



433 



INDEX 



tract, 207; economic, 207; eco- 
nomic significance of, 216. 

Revenue, collection of, 414. 

Ricardo, David, 312. 

Ripley, George, 291. 

Rodbertus, K., 293. 

Roebuck, John, 48. 

Ross, E. A., 399. 

Saving and abstinence, 173; desira- 
bility of, 113. 

Say, J. B., 232. 

Seligman, E. R. A., 399. 

Sherman, John, 394. 

Slavery, introduction of, 23. 

Smith, Adam, 53, 310, 372. 

Socialism, in America, 294; Christian, 
294; claims of, 282; equality and, 
300; inadequacy of, 296; modern, 
290; recent, 293; state, 291. 

Socialists, characteristics of, 295. 

Social order, adjustments of, 283. 

Social paradox, 86. 

Solon, 283. 

Spending and saving, in. 

Stock, care of, 11. 

Strikes, result of, 275. 

Subjects for essay and debate, 429. 

Sweating system, 117. 

Tariff, 409. 

Tax, franchise, 407; income, 402; 
indirect, 408; inheritance, 407; 
land and income, 420; personal, 
406; poll, 401; real, 405; single, 
419. 

Taxation, 389; and economic pro- 
cesses, 389; double, 415; equitable, 
397; just, 397; imperfections of, 
413; of corporations, 417. 

Taxes, classification of, 401; collec- 
tion of, 421; incidence of, 398; 
inequitable assessment of, 42 1 . 

Tellez, Gonzalez, 230. 

Territory, extension of, 141. 

Town economy, 38. 



Towns, rise of, 37. 

Trade, among primitive people, 58; 
balance of, 365; development of, 
42; principles of international, 73. 

Trade unions, 265; mistakes of, 272; 
objects of, 269. 

Trading, 13. 

Trading power, 243. 

Transportation, 13, 80; and agricul- 
ture, 143. 

Trusts, 82, 182, 383. 

Turgot, R. J., 231. 

United States, agricultural area in, 
146; conditions in, 56; land policy 
of, 144. 

Utility, 305; and value, 313. 

Value, 309; and utility, 311; inter- 
national, 360; intrinsic, 315; ob- 
jective, 314; subjective, 314; theo- 
ries of, 312. 

Wage work, 35. 

Wage -fund theory, 218. 

Wages, 198; and business sense, 
224; and philanthropy, 225; 
determination of the rate of, 219; 
economic significance of, 226; 
eight-hour day and its effect on, 
225; improvement by legislation, 
226; increase in, 225; influence 
of labor organizations on, 223; 
iron law of, 220; labor the cause 
of, 217; nominal, 217; rate of, 
219; real, 217; residual claimant 
theory of, 220; scientific law of, 222. 

Walker, F. A., 201. 

Want, degree of, 102. 

Wants, satisfaction of economic, 102; 
variety of, loi. 

Watts, James, 48. 

Wealth, 85 ; conditions of producing, 
131; creation of, 123, 128; nature 
of, 126; struggle for, 305. 

Whitney, Eli, 48. 



434 



*A Students' History of the United States 

By Edward Channing, Professor of History in Harvard University. 

With maps and illustrations. New and enlarged edition. i2mo. 
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Volume I — National Period before the Civil "War 
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